A short swing is a type of regulation that is common to the trading and investment process in the United States. The terms of the short swing rule, as determined by the Securities and Exchange Commission of that country, state that in the event that anyone who is considered a company insider should buy and sell shares of stock issued by that company during a six month period, any profits generated above and beyond the original purchase price must be returned to the issuing company. The idea behind the short swing is to discourage the practice of making use of insider information that was not readily available to other investors at the time of the purchase to earn returns.
As part of the short swing rule, the investor making the purchase must be considered a company insider. This would include individuals who are officers or directors of the company issuing the shares. The rule also considers any investor who holds in excess of 10% of the companies outstanding shares to be a company insider, and in a position to possibly have access to information that is not yet common knowledge in the investment community.
A simple way to understand how the short swing rule works is to consider a company officer who makes a decision to purchase a thousand shares of his or her company’s stock at a price of $10 US dollars per share. Six weeks later, the officer initiates a transaction to sell those same shares at a price of $15 USD per share. Since the purchase and the sale took place in less than six months, the officer will keep enough of the proceeds from the sale to cover the original purchase price, but must tender the remainder of the funds generated by the sale back to the issuing company.
One of the goals of the short swing is to make the process of insider trading less lucrative and thus discourage investors from making use of information that is not readily available to other investors. In particular, this approach helps to minimize the chances of people who are directly associated with the issuing company from generating returns to purchase shares before some significant event or announcement is made to the general public, with the express purpose of selling those shares within a relatively short period of time. The general idea is to provide a more level playing field in the marketplace, providing a wider range of investors with the opportunity to consider all relevant data regarding a specific investment and make a decision whether or not to invest, without affording a select few with an unfair advantage.
