California residents like you have have heard the term “insider trading” before. But do you know what it entails? And do you know how much trouble you can get into if caught doing it?

Insider trading is one of the most well-known type of white collar crime. At the same time, many people do not understand how it works, leading to accidental law breaking.

How do people use insider information?

The Street defines insider trading as a serious and complex crime. As the name implies, it involves the trade of “inside information”. In specific, people use this inside information to make decisions in the stock market.

Insider trading is illegal because it gives people an unfair advantage. For example, someone may hear that a company is about to file for bankruptcy. The person getting this information can sell out their stocks now, before losing any. But the population at large does not know about the bankruptcy looming ahead. They could lose money because they did not get the same early warning.

Insider trading is not used to warn people to sell their stocks. It also gives you a heads up on when to buy stocks. You may hear from someone on the inside of a company that a big merge is happening soon. The same happens whenever large companies have trade deals.

What are the penalties for insider trading?

Because of how harmful insider trading is to the stock market, it has harsh penalties. If convicted of insider trading, you may face steep fines and time in jail. The fines can reach $5,000,000 for individuals. For non-natural persons, it is $25,000,000. This is more than enough to set you back, and is one good reason why you should avoid insider trading.