The government regulates the stock market using numerous approaches.
The government regulates the buying and selling of stock in various ways and through different regulatory authorities, such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS). Different types of traders are also treated differently. Special regulations exist for lawmakers and corporate insiders, and a trader's tax liability is calculated differently if he trades stocks as a career rather than as a sideline.
Jurisdictions
Federal and state laws as well as various governmental authorities regulate stock trading.
Federal laws, such as the Securities Act of 1933 and the Securities Exchange Act of 1934, regulate the responsibility of officers, directors and principal shareholders as it relates to buying and selling stock and other securities. State laws, known as Blue Sky Laws, impose additional registration requirements on brokers and dealers as well as on securities bought and sold within the state.
Insider Trading
Insider trading is legal under specific conditions.
Certain types of government regulations, such as insider trading laws, regulate specific types of investors. Insiders are those who have a relationship with a publicly traded company, such as a corporate executive or the corporation's accountant or law firm, who, because of their relationship to the company, are privy to information about the company that could affect its stock's value. Not all insider trading is illegal. Regulatory authorities have established specific guidelines and formats for disclosure that govern how insider trading can be done legally. Insider trading becomes illegal when an insider buys or sells stock, or advises friends and family to buy or sell stock, based on insider information that is not available to the public. For instance, senior management employees are not permitted to trade their company stock for 24 hours after information disclosed in a board meeting has been made public.
Day Trading
Regulations on how stocks can be traded can be very specific and detailed.
The government also puts special restrictions on how stocks are traded. For instance, day trading is the term used for buying and selling the same security on the same day. Pattern day trading is trading the same security four or more times in five business days when the number of day trades amounts to more than 6 percent of the investor's total trading activity during that same five-day period. A series of government regulations place restrictions on day trading. For instance, day traders are required to trade stocks through a margin account (a type of brokerage account). These margin accounts must maintain a minimum daily equity balance of $25,000 in some combination of cash and stock. If the balance falls below the limit, the account can be suspended for 90 days or until new funds are added.
Tax Laws
Profits, losses and deductions can be treated differently for tax purposes.
Tax laws regulate how the profits realized from trading stock will be taxed. The IRS makes distinctions between investors and traders and taxes the profits of each differently. Those who make their living solely from buying and selling stock are typically traders and their profits are treated as income. Investors, those who occasionally buy or sell stocks and who derive only some of their income from their stock trading activities, have their stock profits taxed as capital gains.
