Tag Archives | insider trading

Securities Exchange Act of 1934

See Also:
Secondary Market
Securities Act of 1933
New York Stock Exchange (NYSE)
Primary Market
Sarbanes Oxley Act of 2002 (SOX)

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 deals with the regulation of secondary market transactions, or outstanding securities in the market (which can be traded on a daily basis). The Securities and Exchange Commission (SEC) regulates this act.

Securities Exchange Act of 1934 Meaning

The Securities Exchange Act of 1934 was established after the stock market crash of 1929 – the following Great Depression. The 1934 Securities Exchange Act is meant to provide meaningful and relevant information to the average investor. This ensures that the investor is not mislead in anyway so that they are able to make well informed decisions. The Securities Exchange Act regulations include the need for quarterly and annual audits by an accounting firm. These accounting firms then attest to the accuracy of the statements.

The Securities Exchange Act of 1934 thus ensures that there is no fraud that exist within the company. It also deals with insider trading. If an investor has information that is non-public in nature then, then under the 1934 Securities Exchange Act, he/she may not act on it until the information has gone public. The idea is to provide a fair and equal market so there are no unusual transactions to set the market adrift.

securities exchange act of 1934

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Securities and Exchange Commission (SEC)

See Also:
New York Stock Exchange (NYSE)
Generally Accepted Accounting Principles (GAAP)
American Institute of Certified Public Accountants – AICPA
Financial Accounting Standards Board (FASB)
Full Disclosure Principle
Corporate Veil
Investment Banks
Treasury Stock
Accounting Fraud Targeted

Securities and Exchange Commission (SEC) Definition

The Securities and Exchange Commission (SEC) is a U.S. government agency that is responsible for protecting the well being of investors. The SEC performs this function by regulating securities whether it is public company stocks, bonds, or any other security issued into the U.S. market.

Securities and Exchange Commission (SEC) Meaning

The Securities and Exchange Commission was created in 1934 to try and rid the market of unfair or corrupt practices. This meant that all publicly traded companies had to present audited financial statements, and meet all other requirements that the SEC established. The idea is to protect the everyday investor who does not have extensive knowledge of markets or securities. Five commissioners operate the SEC, and the President of the United States appoints them. Furthermore, a requirement is that there can only be three members at the most from a single political party. The President also appoints one of these members to be a chairman; however, no one is able to fire them once the President appoints these commissioners. This allows the commissioners to operate in the best interest of the people without worrying about losing his/her job.

Four Divisions of SEC

The SEC has four main divisions Corporation Finance, Trading and Markets, Investment Management, and Enforcement. Each of these has a separate responsibility towards certain securities and how they are offered into the market. Overall, the Securities and Exchange Commission duties have been performed up to par. However, there have been times in which fraud or insider trading has been routed out meaning that the SEC must amend what it is doing to try and avoid the same problems in the future and protect investors.

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securities and exchange commission (sec)

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Insider Trading

See Also:
Blue Sky Laws
Subscription (Preemptive) Rights
Accounting Fraud Prevention using QuickBooks
Binomial Options Pricing Model
Black Scholes Option Calculation

Insider Trading Defined

Insider trading is buying or selling stock based on nonpublic information that will affect the stock’s price. A company’s executives and directors have access to significant information regarding the company’s activities. These people could easily profit by buying or selling the stock based on the private information they have. However, doing so is illegal.

SEC regulations prohibits insider trading, in certain circumstances. The idea is that trading based on private information is unfair. If insider trading were legal, then insiders could make huge profits by buying or selling a company’s stock just before important information is made available to the public. This behavior would put the investing public at a tremendous disadvantage in terms of buying and selling financial securities.

Insider trading is not always illegal. Typically, someone labeled an insider will have designated windows of opportunity throughout the year in which to legally buy or sell the company’s stock. Executives and managers are often awarded stock options, CEOs and directors often own significant amounts of their company’s stock. These people should be able to buy and sell their stock. And they can, but they must do it according to the rules. Insiders must notify the SEC regarding their buying and selling transactions.

Under certain conditions, if an executive announces publicly that he will sell a certain amount of shares or value of stock at a specified date every year, then he may do so each year without it being considered illegal insider trading. Likewise, managers or executives with access to nonpublic information may buy or sell stock after that information has been made available to the public.

Insider Trading Example

For example, imagine an executive at a large publicly traded corporation who sees the company’s income statement before it is issued to the public via the annual report. The executive sees that the corporation suffered big losses in the current period. Once the Wall Street analysts see these numbers, the company will be downgraded. Thus, the stock will decline.

If insider trading were allowed, then the executive could quickly go out and sell the company’s stock short, or else he could tell his broker and his friends and family members to sell the stock short. Selling a stock short makes a profit when the stock price goes down. When the reports are finally made public, the stock will plummet. Then the executive and his friends and family all make a lot of money. Meanwhile, the investors who owned the company’s stock but did not have access to the private information suffered losses.

Who is an Insider?

Technically, an insider is anyone who has access to material nonpublic information regarding a company. Examples of insiders include executives, directors, managers, shareholders with a 10% or greater stake in the company, and the close family members of these people. Insiders may also include lawyers, brokers, investment bankers, and printers of financial documents. It is illegal for insiders to buy or sell a stock based on material nonpublic information.

What is Insider Information?

Inside information is any material nonpublic information regarding a company that could affect the company’s stock price. The information is nonpublic if not yet disclosed to the investing public. The information is material if its disclosure could impact the company’s stock price. Examples of insider information include access to unreleased earnings reports, knowledge of a pending or imminent takeover or merger, or knowledge of any other kind that is of value to investors.

Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

Insider Trading

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Insider Trading

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