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What Is Insider Trading

Insider trading refers to trading conducted by individuals with access to non-public information about a company. There are two types of insider trading - legal and illegal. Legal insider trading involves properly registered transactions by company insiders, while illegal insider trading uses non-public material information for profit without disclosure. The SEC monitors trading volumes and investigates unusual activity to identify potential cases of illegal insider trading, where an insider trades based on private information not available to the general public.

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73 views

What Is Insider Trading

Insider trading refers to trading conducted by individuals with access to non-public information about a company. There are two types of insider trading - legal and illegal. Legal insider trading involves properly registered transactions by company insiders, while illegal insider trading uses non-public material information for profit without disclosure. The SEC monitors trading volumes and investigates unusual activity to identify potential cases of illegal insider trading, where an insider trades based on private information not available to the general public.

Uploaded by

qoashaman
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What Is Insider Trading, and Is It Illegal?

BY MARY HALL https://www.investopedia.com/ask/answers/what-exactly-is-insider-trading/

 Updated Apr 29, 2019


An "insider" is a person who possesses either access to valuable non-
public information about a corporation (this makes a company's directors
and high-level executives insiders) or ownership of stock equaling more
than 10% of a firm's equity.

 
A common misconception is that all insider trading is illegal, but there are
actually two methods by which insider trading can occur. One is legal,
and the other is not.
Legal Insider Trading
Insiders are legally permitted to buy and sell shares of the firm—and any
subsidiaries—that employ them. However, these transactions must be
properly registered with the Securities and Exchange Commission (SEC)
and are done with advance filings. You can find details of this type of
insider trading on the SEC's EDGAR database.

Legal insider trading happens often, such as when a CEO buys back
shares of their company, or when other employees purchase stock in the
company in which they work. Oftentimes, a CEO purchasing shares can
influence the price movement of the stock they own. A good example is
whenever Warren Buffett purchases, or sells, shares in the companies
under the Berkshire Hathaway umbrella.

Illegal Insider Trading


The more infamous form of insider trading is the illegal use of non-
public material information for profit. It's important to remember this can
be done by anyone, including company executives, their friends, and
relatives, or just a regular person on the street, as long as the information
is not publicly known.

For example, suppose the CEO of a publicly-traded firm inadvertently


discloses his/her company's quarterly earnings while getting a haircut. If
the hairdresser takes this information and trades on it, that is considered
illegal insider trading and the SEC may take action.

The SEC is able to monitor illegal insider trading by looking at the trading
volumes of any particular stock. Volumes commonly increase after
material news is issued to the public, but when no such information is
provided and volumes rise dramatically, this can act as a warning flag.
The SEC then investigates to determine precisely who is responsible for
the unusual trading and whether or not it was illegal.
Volume 0%
01:52
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Top 3 Most Scandalous Insider Trading Debacles

Insider Trading vs. Insider Information


Insider information is knowledge of material related to a publicly traded
company that provides an unfair advantage to the trader or investor. For
example, say a vice president of the engineering department of a
technology company overhears a meeting between the CEO and the
CFO.

Two weeks before the company releases its earnings, the CFO discloses
to the CEO that the company did not meet its sales expectations and lost
money over the past quarter. The vice president of the engineering
department knows her friend owns shares of the company and warns her
friend to sell her shares right away and look to open a short position. This
is an example of insider information because earnings have not been
released to the public.

Suppose the vice president's friend then sells her shares and shorts
1,000 shares of the stock before the earnings are released. Now it is
illegal insider trading. However, if she trades the security after the
earnings are released, it is not considered illegal because she does not
have a direct advantage over other traders or investors.

https://www.investopedia.com/ask/answers/what-exactly-is-insider-trading/

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