Insiders often are blessed with owning a significant portion of a company's shares. This possession is often in the form of direct share ownership or through stock options. Since these insiders own – or have the opportunity to own – a lot of shares, it is in their best interest to buy or sell the shares whenever they feel necessary, to realize a profit.

Although some cases of insider trading are illegal, legal insider transactions can take place in two ways: an open-market transaction or a closed-market transaction.

Open-market transactions occur on the open stock market where average investors put through their transactions. The only difference is that insiders must follow certain rules and regulations that have been set out by the Securities and Exchange Commission (SEC). After filing the appropriate documentation, the order goes through the same as all other orders. The purchase or sale made in an open-market transaction is done voluntarily by the insider, and is not regulated by any company rules. Since these trades are made at the insider's discretion, they can be used to identify the his or her sentiment about the stock.

A closed-market transaction is the opposite of an open-market transaction. Any trading that is done in a closed-market transaction is between the insider and the company; no other parties are involved. However, as with an insider's open-market transaction, the appropriate documents must be filed with the SEC to show investors that the transaction took place. Most often, closed-market transactions occur when the insider is receiving shares as part of a compensation package or through stock options. As a result, they do not necessarily reflect the insider's sentiment toward the stock.

  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. 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 >>
  3. 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 >>
  4. Are arm's length transactions always better than transactions not at arm's length?

    Transactions not at arm's length have real tax and other consequences for individuals and businesses, but they are not necessarily ... Read Answer >>
Related Articles
  1. Personal Finance

    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.
  2. Trading

    Can Insiders Help You Make Better Trades?

    Find out why the trading activity of owners and executives can be a valuable trade-confirmation tool.
  3. Trading

    What Investors Can Learn From Insider Trading

    Some insider trading is actually legal - and can be extremely telling for investors.
  4. Investing

    The Viability Of Tracking Insiders

    Insider trading use to be profitable, but can it be today? Learn if investors should be paying attention to insiders.
  5. Insights

    Insider Selling Isn't Always A Bad Sign

    Predated trades at regular intervals can instill confidence, not fear, for investors.
  6. Insights

    Should Insider Trading Be Legal?

    Insider trading has become a hot-button issue. Here are some of the pros and cons to making it legal.
  7. Investing

    How Insider Trading Is Prevented in Corporations

    Insider trading can undermine the markets and damage reputations, so companies and regulators alike have instituted policies and actions to prevent it.
  8. Investing

    Insiders Selling Nvidia Stock

    As insiders sell Nvidia, should shareholders be concerned?
  9. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms, some of them even legal, with the benefits and costs often debated by practitioners and academics alike.
  10. Insights

    Are CEOs Losing Faith in the Trump Rally?

    Insider buying is at a 29-year low despite the market soaring to record new heights.
  1. Open-Market Rate

    Rate of interest that is paid on any debt security that trades ...
  2. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  3. Insider

    A director or senior officer of a company, as well as any person ...
  4. Authorization Only

    A type of sale transaction that creates a pending transaction ...
  5. Round Trip Transaction Costs

    Round trip transaction costs refers to all the costs incurred ...
  6. Precedent Transaction Analysis

    Precedent transaction analysis is a valuation method in which ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center