What Is Insider Information?

Insider information is a non-public fact regarding the plans or condition of a publicly-traded company that could provide a financial advantage when used to buy or sell shares of that or another company's securities.

Understanding Insider Information

Knowing about a company's significant, confidential corporate developments, such as the release of a new product, could provide an unfair advantage if the information is not public and only a few people know about the developments. Insider information is typically gained by someone who is working within or close to a listed company.

Insider trading is illegal when the material information has not been made public and has been traded on. This is because trading on insider information is seen as an unfair manipulation of the free market to give preference to specific parties. It undermines general investor confidence in the integrity of the market and can dampen economic growth. 

Key Takeaways

  • Insider information refers to non-public facts about a publicly-traded company which could provide an advantage to investors.
  • The manipulation of insider information to benefit an investor in buying or selling stock is known as insider trading and is illegal.
  • The Securities and Exchange Commission regulates legal insider trading.

Regulating Insider Information and Trading

If a person uses insider information to place trades, he or she can be found guilty of insider trading. This person can also be found guilty if they advise a third party to place trades based on the information, regardless of whether the insider themselves financially benefited from the ill-gotten information. 

In the United States, the Securities and Exchange Commission (SEC) regulates legal insider trades, in which corporate insiders such as officers, directors and employees, buy and sell stock in their own companies. This sort of trading is permitted but is subject to certain regulations, many of which were encoded in the 1934 Securities Exchange Act. Section 16 of this act aims to prevent illegal insider trading, requiring that when any insider—in this case, owners of at least 10% of a company, officers, and directors—buys and sells stock of the company within a period of six months, all profits must go back to the company.

U.S. courts and lawmakers have expanded the enforceable definitions of insider trading since the law's passage, via high-profile securities fraud decisions and loophole-closing legislation. In 2000, the Congress passed Regulation Fair Disclosure (Regulation FD), which was meant to curb selective disclosure of information by companies to selected shareholders or other traders; it stipulates that any time a firm is disclosing previously non-public information to an interested party, they must make that information public and available to all traders.

The SEC prosecutes trading based on insider information as a serious fraud crime and individuals found guilty can be heavily fined or imprisoned. The business mogul and personality Martha Stewart was indicted in 2003 on securities fraud and other charges after trading to avoid a loss based on insider information, and was imprisoned for five months and fined $30,000.