What is Insider Trading?
Insider trading refers to the trading of securities by corporate insiders such as managers or executives. Insider trading can be legal or illegal depending on if the information used to base the trade is public.
How Does Insider Trading Work? (Example)
Individuals who engage in illegal insider trading attempt to benefit from trades based on information about a company not yet made public.
However, once Company XYZ has announced the merger publicly, insiders such as Company XYZ executives, managers and employees may legally trade the shares based on the information.
To comply with insider trading laws, insider transactions must be reported to the Securities and Exchange Commission (SEC) via Form 4.
Why Do Investors Follow Insider Trading?
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.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Every year in January, I do a big portfolio review. I rebalance my portfolio and make sure that I still like my current mutual funds and ETFs. And I get to know the...Read More →