Insider trading is when corporate insiders (officers, directors, and employees) buy or sell shares of their company. When corporate insiders trade their own stock, they must report those trades to the SEC.
Illegal insider trading refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.
A popular trading strategy is to track insider buying in stocks. The idea is that insiders sell stocks all the time but when insiders buy their stock it could suggest good news is ahead for the company. Traders track insider trading using publicly available SEC filings of Forms 3, 4, and 5.
Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to nonpublic information about the company. In various countries, some kinds of trading based on insider information is illegal. This is because it is seen as unfair to other investors who do not have access to the information, as the investor with insider information could potentially make far larger profits that a typical investor could not make.
The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, some economists have argued that insider trading should be allowed and could, in fact, benefit markets.
Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. Many jurisdictions require that such trading be reported so that the transactions can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. In these cases, insiders in the United States are required to file a Form 4 with the U.S. Securities and Exchange Commission (SEC) when buying or selling shares of their own companies.
The rules governing insider trading are complex and vary significantly from country to country. The extent of enforcement also varies from one country to another. The definition of insider in one jurisdiction can be broad, and may cover not only insiders themselves but also any persons related to them, such as brokers, associates and even family members. A person who becomes aware of non-public information and trades on that basis may be guilty.