A:

An "insider" is any person who possesses at least one of the following:

1) access to valuable non-public information about a corporation (this makes a company's directors and high-level executives insiders)

2) ownership of stock that equals more than 10% of a firm's equity

A common misconception is that all insider trading is illegal, but there are actually two methods by which insider trading can occur. One is legal, and the other is not.

An insider is legally permitted to buy and sell shares of the firm - and any subsidiaries - that employs him or her. 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 EDGAR database.

The more infamous form of insider trading is the illegal use of undisclosed material information for profit. It's important to remember that 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 publicly-traded firm inadvertently discloses his/her company's quarterly earnings while getting 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 is able to monitor illegal insider trading by looking at the 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 volumes 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.

To learn more about insider trading, check out the articles Uncovering Insider Trading, Delving Into Insider Investments and When Insiders Buy Should You Join Them?

RELATED FAQS

  1. Can you accidentally engage in insider trading?

    Learn why it's possible to commit insider trading by accident, and why insider trading laws create logical inconsistencies ...
  2. What role does the Inspector General play with the Securities and Exchange Commission?

    Understand the purpose of the Office of Inspector General, an independent office contained within the Securities and Exchange ...
  3. How long does it take to execute an M&A deal?

    Read about the mergers and acquisitions process, and find out why the average M&A deal can take half a year to three years ...
  4. How is trading volume regulated by the Securities and Exchange Commission (SEC)?

    Learn about how the SEC uses the trading volume formula as one requirement for an exemption to the ban on the resale of restricted ...
RELATED TERMS
  1. Slander

    Slander is the act of harming one person’s reputation by telling ...
  2. Libel

    Libel is publishing a statement about someone in written form ...
  3. Defamation

    Defamation is any statement (written or spoken) that damages ...
  4. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  5. PCI Compliance

    Technical and operational standards that businesses are required ...
  6. Mandatory Binding Arbitration

    A contract provision that requires the parties to resolve contract ...

You May Also Like

Related Articles
  1. Investing Basics

    Can you accidentally engage in insider ...

  2. Professionals

    Is a Google Robo-Advisor on the Horizon?

  3. Investing

    Why We Need Antitrust Laws

  4. Trading Strategies

    IPO Flippers And The Companies Who Hate ...

  5. Professionals

    SEC to Advisors: Implement Cybersecurity ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!