The stock market is a crazy place full of people buying and selling shares in different companies or assets. It’s the Wild West of the investment world in the sense that so much happens in such a short space of time. One of stock market investing’s biggest benefits is that anyone can join in. You don’t need much money to start investing – though you do need to be aware of different laws and regulations. 

Perhaps the most common problem for new investors is accidentally running afoul of the law. A lot of investors do this accidentally, mainly because they aren’t aware of breaking down any legal barriers. It goes without saying that legal issues related to stock market trading will be clamped down on harshly by various governing bodies. 

Speaking of which, this guide will explain some of the most common legal problems to avoid when you’re new to investing. Become aware of these issues to avoid accidentally violating stock market laws and landing in a heap of trouble! 

Market Manipulation

The American stock market is governed by the SEC (U.S. Securities and Exchange Commission), which sets all the laws/regulations and ensures all investors follow them. One of its biggest concerns is market manipulation – which is defined as when someone “artificially affects the supply or demand for a security.” 

In simpler terms, it means you purposely do something that causes stock prices to either rise or fall. 

You’re manipulating the market to make it look like certain stocks are doing either better or worse than they truly are. One common example of this is the spread of misinformation about a particular company or security. You could take to social media and spread nonsense about a company looking like it’s about to go bust. This may lead to loads of people selling their shares, dropping the stock price. From there, you could scoop up cheap shares and make a profit when the price inevitably goes up again. 

Despite being a common concern, market manipulation is something you can easily avoid. It’s rarely a thing someone does by accident – unless you spread information intended as a joke and people take it seriously. 

Insider Trading

By contrast, insider trading is arguably the most common law that people unknowingly break. Most people have heard of this term, but what does it actually mean? According to Investopedia, insider trading is when someone buys or sells securities based on nonpublic material information. 

It goes on to add that material information is “anything that could substantially affect an investor’s decision to buy or sell.” 

In other words, you’ve made investment choices on the stock exchange based on information that other members of the public do not have. This gives you an unfair advantage, which is one of the main reasons it’s considered illegal. The most iconic instance of insider trading comes from an unlikely source: Martha Stewart. She was accused of insider trading after selling 4,000 ImClone shares the day before the stock price fell to dramatic levels. It was a massive scandal because her stock broker tipped her off that the ImClone CEO was about to sell his shares. 

This is a classic example of nonpublic information helping an investor. It meant she gained far more from selling her shares than the rest of the public, who were caught unawares by the drastic share price decline. You can also see this as an example of blatant insider trading – she clearly knew this information wasn’t public, yet still acted on it. 

Accidental insider trading is the most worrisome because you don’t know you’re doing it. This is when someone tips you off about something or passes information without you realizing it’s nonpublic information. Even if you have nothing to do with a company, you can be charged with insider trading in a case like this. It’ll mean you need an SEC Defense & Insider Trading Defense Attorney to fight your corner and prove that you didn’t intend to do this and were simply taking investment advice. 

Avoid this issue by asking for evidence before accepting investment advice. You need to see that their advice comes from public material information – if it doesn’t, don’t act upon it! 

Conflicts of Interest

Lastly, you can easily be found guilty of investing with conflicts of interest. What does this mean? It’s when you invest or encourage other people to invest because it benefits you financially. Basic examples are business owners getting people to buy shares in their company. The more people that buy, the more the business owner ends up earning. 

So, if you own a business or are on the board of directors, you can’t get people to invest in company shares. It’s a clear conflict of interest, and the SEC will chase you down and see that you’re punished. 

There’s another way you can be embroiled in a conflict of interest saga. If your broker asks you to invest in shares because they gain something from it, then you could be placed under legal scrutiny. This is especially problematic if they tell you they’re getting paid to promote stock and will give you a cut of their commission. The SEC will likely see this as a type of stock market fraud, so you’ll both be hit with sanctions and penalties. 

As a general rule, you should avoid any stock market investments with a direct link to you or the individual recommending them to you. This will help you steer clear of any conflicts of interest. 

Summary – Staying Away From Legal Issues

If the SEC discovers you’ve broken the law while investing in the stock market, you can be hit with some huge fines and penalties that leave you on the verge of bankruptcy. Not only that, but you may also be banned from investing in the future – or worse, sent to jail. 

It’s not something to take lightly, so make sure you avoid all of the legal issues noted above. Don’t take random investment advice online, don’t try to influence the price of your investments, and don’t invest in things if you’re closely linked to them.