Loading the player...
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. How often should I measure my company's key performance metrics (KPIs)?

    Learn the definition of illegal insider trading while reviewing the people who can be involved and the regulations and consequences ... Read Answer >>
  2. What's the difference between insider trading and insider information?

    Learn about insider information and insider trading and the differences between the two; both involve nonpublic information ... Read Answer >>
  3. 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 ... Read Answer >>
  4. What is the difference between wash trading and insider trading?

    Explore the differences between two trading practices, wash trading and insider trading, and find out why these practices ... Read Answer >>
  5. What is the difference between open-market and closed-market transactions?

    Insiders often are blessed with owning a significant portion of a company's shares. This shared ownership is often in the ... Read Answer >>
  6. If I write a blog post about stocks I own, is that considered insider trading?

    Learn about whether writing a blog post about a stock you own is insider trading. Cracking down on inside trading is an important ... Read Answer >>
Related Articles
  1. Investing Basics

    Explaining Insider Trading

    While often associated with illegal activity, insider trading actually encompasses both illegal and legal trading of securities.
  2. Investing

    How The SEC Tracks Insider Trading

    We look at how the SEC tracks and tries to stop insider trading - a seemingly impossible task.
  3. Investing

    Buy Stock With Insiders: How To Track Insider Buying

    Insider buying can be a sign that a company's stock prices will soon rise. Here's how to keep track of insider buying on public databases and websites.
  4. Options & Futures

    When Insiders Buy, Should Investors Join Them?

    Insider tracking can inform your investment strategy, but it requires research and a level head. Find out what to look for.
  5. Options & Futures

    Keeping An Eye On The Activities Of Insiders And Institutions

    These transactions reveal much about a stock. We go over what to consider and where to find it.
  6. Budgeting

    6. Insider Trading

    Companies provide distress signals long before they go under. Find out how to read them.
  7. Options & Futures

    Insider Selling Isn't Always A Bad Sign

    Predated trades at regular intervals can instill confidence, not fear, for investors.
  8. Options & Futures

    Delving Into Insider Investments

    Keeping tabs on company executives can provide clues about where a stock is headed.
  9. Professionals

    Insider Trading and Securities Fraud Enforcement Act of 1988

    FINRA Series 6 Exam Study Guide - Insider Trading and Securities Fraud Enforcement Act of 1988. This section defines an Insider and discusses the fines and penalties for giving out insider information.
  10. Professionals

    Excessive Trading and Insider Trading

    FINRA/NASAA Series 66 - Excessive Trading and Insider Trading. This section explains excessive and insider trading.
RELATED TERMS
  1. Insider Trading

    The buying or selling of a security by someone who has access ...
  2. Insider Buying

    The purchase of shares of stock in a corporation by someone who ...
  3. Insider Information

    A non-public fact regarding the plans or condition of a publicly ...
  4. Signaling Approach

    The idea that insiders have information not available to the ...
  5. Insider

    A director or senior officer of a company, as well as any person ...
  6. Form 3

    A document that must be filed with the Securities and Exchange ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center