Insider Trading

When most people hear the term “insider trading” they think of the illegal version. However, the term “insider trading” can also mean the perfectly legal buying and selling of stock by a company’s corporate insiders. Insider trading is legal when these corporate insiders trade stock of their own company and report these trades to the U.S. Securities and Exchange Commission (SEC). That way the insider trading is not kept a secret and anyone can find out a corporate insider’s opinion of his or her company.

Insider trading” refers to transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information originating within the firm that would, once publicly disclosed, affect the prices of such securities. Corporate insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information.

Insider trading is only illegal when a person bases their trade of stocks in a public company on information that the public does not know. It is illegal to trade your own stock in a company based on this information but it is also illegal to give someone that information, a tip, so they can trade their stock.

For years, regulators such as the U.S. Securities and Exchange Commission (SEC) tried to improve transparency around insider trading only to be blocked by heavy corporate lobbying. Finally, the SEC introduced rules forcing all U.S. companies to provide access to their insider transaction filings on their corporate websites starting in June 2003. The SEC’s job is to make sure that all investors are making decisions based on the same information. Insider trading can be illegal because it destroys this level playing field.

People engage in fraud when the three conditions of the triangle of fraud are met: need,...