Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Insider Trading

What it is:

Insider trading refers to the trading of securities by corporate insiders such as managers or executives.

How it works (Example):

Insider trading can be legal or illegal depending on if the information used to base the trade is public.

Individuals who engage in illegal insider trading attempt to benefit from trades based on information about a company not yet made public. For example, an executive of Company XYZ who purchases shares of the company based on a pending merger announcement is engaging in illegal insider trading.

However, once Company XYZ has announced the merger publicly, insiders may legally trade the shares based on the information.

Insider transactions must be reported to the Securities and Exchange Commission (SEC) via Form 4.

Why it Matters:

Some investors follow legal insider trading because they believe insiders have a better insight to the financial health of a company.

For example, a CEO buying shares of his company conveys confidence in the future of the business.

Meanwhile, illegal insider trading can lead to fine and even imprisonment for the guilty party.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...