Insider Trading

The unlawful practice of using information that comes from a source “inside” the business but is not available to the general public to trade on the stock market. This activity is prohibited by law and is policed by the Securities and Exchange Commission.

Note: In the mid-1980s, several revelations of insider trading rocked Wall Street.

Insider Trading

The buying or selling of a security by someone who has access to material, nonpublic information about the security.

Investopedia Commentary

Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access to such knowledge. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as brokers and even family members can be guilty.

Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors. The SEC, however, still requires all insiders to report all their transactions. So, as insiders have an insight into the workings of their company, it may be wise for an investor to look at these reports to see how insiders are legally trading their stock.

Related Links

Uncovering Insider Trading
Can Insiders Help You Make Better Trades?
When Insiders Buy, Should Investors Join Them?

See also: Inside Director, Insider, Insider Information, Open Market Transaction, Poop, SEC

insider trading

The illegal buying or selling of securities on the basis of information that is generally unavailable to the public. An example is the purchase by a director of shares of his or her firm's stock just before the release of surprisingly good earnings information.