Insider trading is a trade made with material and nonpublic information. Insider trading undermines the integrity of security markets. Its detection and prevention is one of the utmost priorities of the Securities and Exchange Commission (SEC). It is such a serious matter that every investor must be aware of the regulations regarding it. There are many factors to determine if a trade is an illegal insider trade.

The information used when buying or selling a company's stock must be transparent. Illegal insider trading occurs when a trade is placed based on material, nonpublic information. Information is material when it can affect a company's stock price. Acquisitions, mergers, earnings announcements, dividend announcements and the release of research findings can all be considered material. Information is nonpublic if it is still privileged and has not been released to the public and other investors.

Any person can be involved in insider trading. Anyone who has material and nonpublic information can be considered an insider. Directors and officers of companies, corporate executives, company researchers and government officials can be examples of tippers. Family members, friends, hairstylists, taxi cab drivers and others who overhear sensitive information can be tippees. If involved in insider trading, both parties are at fault and could be held liable.

The consequences of illegal insider trading are serious. The SEC has filed hundreds of cases in recent years against individuals and corporations, including attorneys, hedge fund managers and financial professionals. If found guilty, a person can face monetary penalties and imprisonment depending on the severity of the case.

  1. What exactly is insider trading?

    Two common misconceptions are that all insider trading is illegal and that insider trading and insider information are the ... Read Answer >>
  2. In what areas does adverse selection exist in the stock market?

    Read about some of the types of adverse selection in the stock market, whether that includes insider trading, and how intermediaries ... Read Answer >>
  3. What happens to the fines collected by the Securities and Exchange Commission?

    When the Securities and Exchange Commission (SEC) enforces a civil action against a corporation or an individual found guilty ... Read Answer >>
  4. What is the difference between open-market and closed-market transactions?

    Legal insider transactions can take place in two ways: an open-market transaction or a closed-market transaction. Learn about ... Read Answer >>
  5. What is an IPO lock-up period and how long is it?

    An initial public offering (IPO) lock-up period is a contractual restriction that prevents insiders who are holding a company's ... Read Answer >>
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  1. Insider Information

    Insider information is a non-public fact regarding the plans ...
  2. Insider Buying

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

    Material information, about certain aspects of a company, that ...
  4. Insider Trading Sanctions Act Of 1984

    Legislation that allows the SEC to seek a civil penalty, of up ...
  5. Poop

    A slang term often used to describe inside information or people ...
  6. Insider Trading Act of 1988

    An act enabled in 1988 to increase the liability penalties to ...
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