Insider trading refers to the buying or selling of a publicly traded company’s stock by someone who has non-public, material information about that stock. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still non-public. Various countries have their own rules on insider trading, which usually involve severe penalties for violations.

Understanding Insider Trading

Insider trading regulations aim to level the playing field for all investors by requiring that everyone trading on the market has access to the same information. However, insiders, as the term suggests, have an inherent advantage over outsiders in this respect.

Insider Trading Example

For example, if a CEO knows that their company will soon release unfavorable financial results, they may sell their stock before the news becomes public. By doing so, they can avoid losses that would occur once the news is out and the stock price falls.

Legal vs. Illegal Insider Trading

Insider trading can be legal if the trading occurs on the basis of information which is available to the public. For example, a CEO buying stock in their own company while they know of an impending merger that has been publicly announced is not illegal.

Regulation of Insider Trading

In the United States, the Securities and Exchange Commission (SEC) regulates insider trading. The SEC has defined insider trading as any buying or selling of securities by someone who has access to material, non-public information about those securities. The SEC’s regulations regarding insider trading are based on the premise that all investors should have equal access to important information about publicly traded companies.