Insider Trading

Intermediate

Insider trading is buying or selling a company's securities while in possession of material information about the company that is not yet public, which is illegal in most countries.

Material information is information a reasonable investor would consider important, such as upcoming earnings results, a planned takeover, a major contract or a failed drug trial. Using such information to trade before it is public gives an unfair advantage and undermines trust in markets.

Insider trading laws apply not only to company directors and employees but also to anyone who receives confidential information, such as lawyers, bankers, consultants, friends and relatives, and to those who pass on tips.

For example, an employee who learns their company is about to be acquired at a large premium, and buys shares before the announcement, is engaging in illegal insider trading.

Legal insider trading also exists. Directors and employees can buy and sell their company's shares, provided they do not use inside information, follow company trading windows and report their trades as required. Many executives use pre-arranged trading plans to avoid suspicion. Penalties for illegal insider trading can include large fines and prison sentences.

For worked examples and full lessons, visit notesbysara.org.