Loading the player...

What is 'Insider Trading'

Insider trading is the buying or selling of a security by someone who has access to material nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.

BREAKING DOWN 'Insider Trading'

Illegal insider trading includes tipping others when you have any sort of nonpublic information. Legal insider trading happens when directors of the company purchase or sell shares, but they disclose their transactions legally. The Securities and Exchange Commission has rules to protect investments from the effects of insider trading.

Martha Stewart and Insider Trading

Directors of companies are not the only people who have the potential to be convicted of insider trading. In 2003, Martha Stewart was charged by the SEC with obstruction of justice and securities fraud – including insider trading – for her part in the 2001 ImClone case.  

Stewart sold close to 4000 shares of biopharmaceutical company ImClone Systems based on information received from Peter Bacanovic, a broker at Merrill Lynch. Bacanovic's tip came after ImClone Systems' chief executive officer (CEO), Samuel Waksal, sold all his shares of the company. This came around the time ImClone was waiting on the Food and Drug Administration (FDA) for a decision on its cancer treatment, Erbitux.

Shortly after these sales, the FDA rejected ImClone's drug, causing shares to fall 16% in one day. The early sale by Stewart saved her a loss of $45,673. However, the sale was done based on a tip she received about Waksal selling his shares, which was not public information.

After a 2004 case, Stewart was charged with lesser crimes of obstruction of a proceeding, conspiracy, and making false statements to federal investigators. Stewart served five months in a federal corrections facility. 

Amazon Insider Trading Case

In September 2017, former Amazon.com Inc. (AMZN​) financial analyst Brett Kennedy was charged with insider trading. Authorities said Kennedy gave fellow University of Washington alumni Maziar Rezakhani information on Amazon's 2015 first quarter earnings before the release. Rezakhani paid Kennedy $10,000 for the information. 

In a related case, the SEC said Rezakhani made $115,997 trading Amazon shares based on the tip from Kennedy.

Legal Insider Trading

The term "insider trading" is generally negative. Legal insider trading happens in the stock market on a weekly basis. The SEC requires transactions to be submitted electronically in a timely manner. Transactions are submitted electronically to the SEC and also must be disclosed on the company’s website.

The Securities Exchange Act of 1934 was the first step to the legal disclosure of transactions of company stock. Directors and major owners of stock must disclose their stakes, transactions and change of ownership. Form 3 is used as an initial filing to show a stake in the company. Form 4 is used to disclose a transaction of company stock within two days of the purchase or sale. Form 5 is used to declare earlier transactions or those that have been deferred.

  1. Insider Information

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

    A director or senior officer of a company, as well as any person ...
  3. ImClone - IMCL

    A publicly-traded biotechnology company marketing products in ...
  4. Form 5

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

    The idea that insiders have information not available to the ...
  6. Material Insider Information

    Material information, about certain aspects of a company, that ...
Related Articles
  1. 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.
  2. Insights

    How The SEC Tracks Insider Trading

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

    Defining Illegal Insider Trading

    The better you understand why insider trading can be criminal, the better you'll understand how the market works.
  4. 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.
  5. 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.
  6. Investing

    How to watch insider and institution activities

    Learn why the transactions of insiders and institutions reveal much about a stock, and what to consider when making well-informed investment decisions.
  7. 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.
  8. Trading

    Top 4 Most Scandalous Insider Trading Debacles

    Here we look at some of the landmark incidents of insider trading.
  9. Financial Advisor

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  10. Investing

    SEC Employees Enjoy Same Hefty Investment Returns as Insider Traders They Prosecute

    SEC employees are getting huge investment returns just like the companies they investigate for insider trading.
  1. Why did the Department of Justice launch an inquiry into the sale of ImClone shares ...

    On December 28, 2001, the FDA announced that it was rejecting ImClone's new cancer drug, Erbitux. The drug represented a ... Read Answer >>
  2. Who are the most famous people convicted of insider trading?

    Learn about some famous people who were convicted of illegal insider trading and find out about the reasons for their criminal ... Read Answer >>
  3. What are some CEO characteristics/behaviors that could lead to a drop in stock prices?

    Learn about CEO behaviors that may adversely affect a stock price. Explore the conviction of Martha Stewart for obstruction ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. 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 ...
  5. Entrepreneur

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

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