Insider Trading: Trading on Information the Public Doesn't Have

By Imperialpedia Staff

Insider trading refers to buying or selling a security based on material information that hasn't yet been made public. It becomes illegal specifically when someone trades — or tips off someone else who trades — using confidential information obtained through a position of trust, such as being a company employee, executive, or advisor privy to non-public developments.

Legal Insider Trading Actually Exists

Corporate insiders like executives and board members are allowed to buy and sell their own company's stock legally, provided they properly disclose those trades to regulators and don't trade while in possession of material non-public information, such as unreleased earnings results or a pending merger announcement.

What Makes Information Material

Not every piece of internal information rises to the level that would trigger insider trading rules. Information is generally considered material if a reasonable investor would view it as significantly likely to affect their decision to buy, sell, or hold the stock — things like undisclosed merger talks, major earnings surprises, or regulatory findings typically qualify.

Tipper-Tippee Liability

Illegal insider trading isn't limited to the person who originally possessed confidential information. Someone who receives a tip and trades on it, or passes it along to someone else who trades, can also be held liable, particularly if the person who leaked it received some personal benefit in exchange, even something as informal as a favor between friends.

IMPORTANT

Regulators like the SEC monitor unusual trading patterns around major corporate announcements specifically to detect insider trading, and enforcement actions frequently target trades made by people several steps removed from the original source of the information.

Table of Contents

Insider Trading: Trading on Information the Public Doesn't Have

Legal Insider Trading Actually Exists

What Makes Information Material

Tipper-Tippee Liability

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