You mention to one of your friends or business associates that you’ve been getting more into investing. They get excited about it and tell you that they have a hot stock tip that you should take advantage of. They then go on to tell you exactly which shares they believe you should buy and when you should do it to maximize your gains.
You feel torn. On one hand, you do want to invest your money wisely and it seems like this information could be financially beneficial. On the other hand, you’re worried about being accused of insider trading.
Where did they get the information?
The important thing to note is that someone can give out stock tips. It is not illegal to take advice from others. If that person has analyzed the market or is simply interested in a certain type of business or technology, they can give you what they consider to be helpful advice. You can then decide if you would like to use their advice or not. This is not insider trading.
When it becomes a problem is if they are using non-public information to tell you what to buy. For instance, maybe their brother is a CEO at a major corporation. They know there is going to be a merger in the next week that is going to push up the stock price. But the public doesn’t know about the merger, so it would be unfair if you acted on this stock tip.
This situation can get fairly complicated, especially if you are facing accusations of insider trading when you believe the tip was legal. You must know what defense options you have.