Definition: The Insider Trading means, buying and selling off public company’s stock shares by a person who have an access to the material non-public information. The insider trading might be legal or illegal depending on the trading being done as a result of publicly disclosed information or on the basis of non-disclosure of material information to the public.
In insider trading, the insiders are the people who know every minute detail about the corporation in which they are employed, such as CEOs, managers, employees, directors or any owner having more than 10% equity in the share capital. If these people purchase or sell their shares on the basis of material non-public information, which is not disclosed to all the potential investors, are considered fraudulent, since they are violating their legal and ethical duty towards the shareholders.
Not only the insiders but also their associates, friends, family members, etc., if trading in the company’s stock shares on the basis of material non-public information is found guilty. For example, if the CEO of the company knows, that his company is likely to be taken over by the other firm, may inform his relative to buy the shares as the share value is likely to rise drastically in the future, will be considered as an illegal insider trading.
If the insider buys and sells the shares of the firm in which they are employed, on the basis of material information known to all the potential investors, then the insider trading is considered as legal. Also, the insider is required to properly register his transaction with the Securities and exchange commission and should be done with advance fillings.