What Is Insider Trading?

What Is Insider Trading?

Insider trading is defined as buying or selling stocks on public exchanges using information that is not publicly known or available to other investors or traders. This happens when people with access or connections to confidential or non-public financial information, news, or facts about a publicly traded company trade based on what they know or share it with others that use it for buying, selling, or selling short.

It can be either negative or positive news or information that could create foreknowledge about the increasing or decreasing value of a company that could trigger a move in a stock’s price action.  It has to be meaningful information about a potential change in value of a stock that could tell someone in advance whether traders should buy or sell. 

A company’s stock could have a change in value and lead to a quick move to a higher or lower price after the public knows this new information, depending on how it will affect sales, revenue, profit margins, reputation, or cash flow.

In most countries insider trading with information that is not available to the general public is against the law and immoral.

There are economists and traders that think insider trading is still difficult to profit from because of the difficulty of knowing how the public will react to both good or bad circumstances based on new information. 

Insider trading rules:

  1. One way the U.S. Securities and Exchange Commision tries to monitor any illegal insider trading is through large increases in trading volumes of securities when there is no news event to justify the increase in interest. 
  2. An insider is defined as anyone with access to important financial information that is not available to the general public or an investor with ownership of equity in a company of more than 10%.
  3. Company insiders are allowed legally to buy and sell shares of stock, but these trading transactions must be registered for monitoring by the SEC.
  4. Legal insider trading happens when a company CEO decides to buy back stock in the company, or anytime employees buy or sell stock in the same company where they are currently employed based on publicly available information and their own personal beliefs. 
  5. The use of non-public available company information to make trading decisions for personal profit is considered illegal.

Insider trading can result in jail time in some countries. 

What Is Insider Trading?
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