What qualifies as insider trading?

Insider trading involves buying or selling a company’s stock by someone who has non-public, material information about that stock. This practice is illegal because it causes investors to lose confidence in how fair the securities markets are.

Non-public, material information

Non-public information includes any details not released to the general public. Material information is any detail that could influence an investor’s decision to buy or sell the stock. Examples include earnings reports, merger or acquisition plans, or changes in top management.

Who can commit insider trading?

Company executives, employees, board members, and others with access to confidential information can commit insider trading. Family members or friends who receive and act on insider tips can also bear liability.

Legal vs. illegal insider trading

Not all insider trading is illegal. Legal insider trading happens when corporate insiders—which include directors, officers, and employees—sell or buy their own companies’ stock without exploiting confidential information. They should also report their trades to the SEC. Illegal insider trading is trading based on material information not available to the public.

Consequences of insider trading

Insider trading accusations are serious as convictions can come with a range of potential legal consequences. Penalties for insider trading can be severe and often include substantial fines and imprisonment. Authorities can prosecute both the person who provided the tip and the person who received it. Seek advice from a financial or legal expert if you have questions about legal trading practices. 

Understanding insider trading

Understanding what qualifies as insider trading helps ensure compliance with securities laws. By adhering to ethical trading practices, investors can contribute to a fair and transparent market environment.