What is an 'Insider'

Insider is a term describing a director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company's voting shares. For purposes of insider trading, the definition is expanded to include anyone who trades a company's shares based on material nonpublic knowledge. Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company.

BREAKING DOWN 'Insider'

Securities legislation in most jurisdictions has stringent rules in place to prevent insiders from taking advantage of their privileged position for pecuniary gain through insider trading. Offenses are punishable by disgorgement of profits and fines, as well as incarceration for severe offenses. In the United States, the Securities and Exchange Commission (SEC) makes rules concerning insider trading. While the term often carries the connotation of illegal activity, corporate insiders can legally buy, sell or trade stock in their company if they notify the SEC.

People the SEC Considers Insiders

Investors gain insider information through their work as corporate directors, officers or employees. If they share the information with a friend, family member or business associate and the person who receives the tip exchanges stock in the company, he is also an insider. Employees of other companies in a position to gain insider information, such as banks, law firms or certain government institutions can also be guilty of illegal insider trading. Insider trading is a violation of the trust investors place in the securities market, and it undermines a sense of fairness in investing.

Examples of Insider Trading

In one of the first cases of insider trading after the United States formed, William Duer, an assistant to the secretary of the Treasury, used information he gained from his government position to guide his purchases of bonds.

Albert Wiggin was a respected head of Chase Bank who used insider information and family-owned corporations to bet against his own bank. When the stock market crashed in 1929, Wiggin made $4 million. In the fallout from this incident, the 1933 Securities Act was revised in 1934 with stricter regulations against insider trading.

Martha Stewart was convicted of insider trading when she ordered the sale of 4,000 shares of ImClone Systems Inc. at $50 per share just days before the Food and Drug Administration rejected the corporation's new cancer drug. After the announcement, the stock priced dropped to $10 per share. For her role, Stewart was fined $30,000 and spent five months in prison.

RELATED TERMS
  1. Tip From A Dip

    A tip from a dip is advice from a person who claims to have inside ...
  2. Insider Trading

    Insider trading is the buying or selling of a security by someone ...
  3. Inside Market

    The inside market is the spread between the highest bid price ...
  4. Inside Sales

    Inside sales is the sale of products or services by personnel ...
  5. Inside Days

    A charting term used by technical analysts and day traders. Inside ...
  6. Signaling Approach

    A signaling approach refers to the act of following various market ...
Related Articles
  1. Investing

    When insiders buy, should investors join them?

    Insider trading activity can inform your investment strategy, but it requires research and a level head. Here's what to look for as insiders buy and sell.
  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. Insights

    How The SEC Tracks Insider Trading

    We look at how the SEC tracks and tries to stop insider trading - a seemingly impossible task.
  4. 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.
  5. Investing

    How to use insider and institutional ownership

    Learn why insider and institution stock ownership reveal much information about the stock. Understand what to consider when making well-informed investment decisions.
  6. 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.
  7. Financial Advisor

    Company Insiders Aren’t Buying Stock: Should You?

    Purchases of company stock by insiders is on the decline. Is this a warning sign?
  8. Trading

    Defining Illegal Insider Trading

    The better you understand why insider trading can be criminal, the better you'll understand how the market works.
  9. Insights

    Insider Selling Isn't Always A Bad Sign

    Are you using insider trading as a signal for your own buying or selling strategy? You may need to reconsider the approach since rule 10b5-1 prohibit trading based on inside information.
  10. Trading

    Trade Forex Through Inside Day Breakout Strategy

    Inside day breakout is a popular strategy for forex trading. Here's how to recognize the patterns, entry/exit points and trading scenarios.
RELATED FAQS
  1. 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 >>
  2. Shares outstanding versus floating stock: what's the difference?

    Shares outstanding and floating stock are different measures of the shares of a particular stock. Learn the difference and ... Read Answer >>
  3. 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 >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center