Insider Trading Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Insider Trading, written in plain English, along with examples of how it is used.

What is Insider Trading?

It refers to the buying and selling of the stocks of a company listed in the stock exchange, on the basis of the private and confidential information gathered from the company officials or by gaining employment in the company. Such insiders are aware of the valuation of the stock.

History and Meaning of Insider Trading

Insider trading is a fraudulent and illegal practice where individuals buy or sell securities based on non-public and confidential information. The Securities Exchange Act of 1934 prohibits insider trading, and the Securities and Exchange Commission (SEC) is responsible for enforcing the law. This practice undermines the public's trust in the marketplace, as it creates an unfair advantage for insiders who have access to sensitive information.

Insider trading is a serious crime that can result in jail time, fines, and penalties. The SEC investigates and prosecutes individuals and corporations that engage in insider trading, and those found guilty are subject to severe consequences. Companies can also face reputational damage and legal liability if they fail to prevent insider trading within their organization.

Examples of Insider Trading

  • A CEO sells his shares in the company just before the release of a negative earnings report.
  • An employee of a pharmaceutical company buys stock in the company before the FDA approves a new drug.
  • A member of the company's board of directors discloses confidential information to a friend who then trades on that information.

Legal Terms Similar to Insider Trading

  • Securities Fraud: This is a broader term that encompasses a variety of deceptive and fraudulent practices in the securities market, including insider trading.
  • Front Running: This refers to the practice of buying or selling a security based on knowledge of pending transactions to take advantage of the impact the transaction will have on the market.
  • Market Manipulation: This involves intentionally distorting the price or volume of a security to create a false impression in the market.