What Is Insider Trading?

An insider is a person who possesses either access to valuable non-public information about a corporation or ownership of stock equaling more than 10% of a firm's equity. This makes a company's directors and high-level executives insiders.

Understanding Insider Trading

Legal Insider Trading

Insiders are legally permitted to buy and sell shares of the firm and any subsidiaries that employ them. However, these transactions must be properly registered with the Securities and Exchange Commission (SEC) and are done with advance filings. You can find details of this type of insider trading on the SEC's .

Legal insider trading happens often, such as when a CEO buys back shares of their company, or when other employees purchase stock in the company in which they work. Often, a CEO purchasing shares 澳洲幸运5官方开奖结果体彩网:can influence the price movement of the stock they own.

A good example is whenever Warren Buffett purchases 🥂or sells 🌃shares in the companies under the Berkshire Hathaway umbrella.

Illegal Insider Trading

The more infamous form of insider trading is the illegal use of non-public material information for profit. It's important to remember this can be done by anyone including company executives, their friends, and relatives, or just a regular person on the street, as long as the information is not publicly known.

For example, suppose the CEO of a 澳洲幸运5官方开奖结果体彩网:publicly traded firm inadvertently d🦋iscloses their company's quarterly earnings while ge🍷tting a haircut. If the hairdresser takes this information and trades on it, that is considered illegal insider trading, and the SEC may take action.

The SEC can monitor illegal insider trading by looking at the 澳洲幸运5官方开奖结果体彩网:trading volumes of any particular stock. Volumes commonly increase after material news is issued to the public, but when no such information is provided and ꦫvolumes rise dramatically, this can act as a warning flag. The SEC then investigates to determine precisely who is responsible for the unusual trading and whether or not it was illegal.

Insider Trading vs. Insider Information

澳洲幸运5官方开奖结果体彩网:Insider information is knowledge of material related to a publicly traded company that provides an unfair advantage to the trader or investor. For example, say the vice president oꦫf a technology company's engineering department overhears a meeting between the CEO and the CFO.

Two weeks 澳洲幸运5官方开奖结果体彩网:bef💫ore the co𒀰mpany releases its earnings, the CFO discloses to the CEO that the company did not meet its sales expectations and lost money over the past 𓆉quarter. The vice president of the engineering department knows their friend owns shares in the company and warns the friend to sell their shares right away and look to open a short position. This is an exampl🍨e of insider information because earnings have not been released to the public.

Suppose the vice president's friend then sells their shares and shorts 1,000 shares of the stock before the earnings are released. Now it is illegal insider trading. However, if they trade the security after the earnings are released, it is not considered illegal because they do not have a direct advantage over other traders or investors.

The Bottom Line

Insider trading involves buying or selling a company's stock based on access to non-public, material information or by those holding a significant stake (10% or more) in the company. While insider trading has legal forms, such as executives purchasing shares in their own companies with SEC filings, there are also illegal forms.

Illegal insider trading occurs when individuals trade based on confidential information not yet disclosed to the public, thus gaining an unfair advantage. The SEC actively monitors trading volumes to detect irregular patterns that might indicate illegal activity, differentiating legal tr🌄ades from unauthorized use of insider information.