What is Insider Trading?
Written by True Tamplin, BSc, CEPF®
Updated on July 27, 2021
Insider Trading Definition
Insider trading refers to the trading of publicly traded securities by someone who has material, non-public information about the stock.
Material in this case refers to any information that may significantly impact an investor’s decision to buy or sell the stock; non-public means that the information is, at the time of trading, only available to “insiders”and not to any public investors.
Insider Trading Defined in Simple Terms
Insider trading is illegal when it gives an insider an unfair advantage over other investors.
To use an example, in 2003 Martha Stewart was charged with insider trading by the SEC after dumping 4000 shares of pharmaceutical company ImClone Systems after receiving an insider tip.
At the time ImClone had an anti-cancer drug being reviewed by the FDA; right after she sold her shares, it became public knowledge that the drug had been rejected and that the CEO of ImClone had also dumped all of his company shares.
Shortly after her sale, stock prices of ImClone dropped 16%.
Insider Trading Exclusions
Although insider trading is often illegal, and carries a highly negative connotation, the SEC has held that there are circumstances where it can be done legally.
Members of a company are allowed to trade shares of their own company, so long as those transactions are fully disclosed to the SEC, who will make them public information.