What it is:
An insider is an employee, director or any other person who is privy to confidential, nonpublic information about a company.
How it works (Example):
Given their position, managers and executives within a company are privy to information about a company's operations that is not available to the investing public. The news and details of an upcoming merger or special dividend that have not yet been announced are two examples of insider information. Once information has been made public by the company, it is no longer considered "insider" information.
Why it Matters:
Individuals with access to insider information have an unfair advantage in the market. Using this information to base a trade is an illegal practice known as "insider trading."
It is also illegal for a person with insider information to pass it to a third party so that they may use the information to profit.