insider trading

Insider Trading

The buying or selling of a security by someone who has access to material, nonpublic information about the security.

Notes:

Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access to such knowledge. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as brokers and even family members can be guilty.

Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors. The SEC, however, still requires all insiders to report all their transactions. So, as insiders have an insight into the workings of their company, it may be wise for an investor to look at these reports to see how insiders are legally trading their stock.

See also: Inside Director, Insider, Insider Information, Open Market Transaction, Poop, SEC

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Insider trading

Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.

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insider trading

The illegal buying or selling of securities on the basis of information that is generally unavailable to the public. An example is the purchase by a director of shares of his or her firm's stock just before the release of surprisingly good earnings information.

Case Study In November 2001 the Securities and Exchange Commission charged 15 individuals with insider trading in the shares of Nvidia Corporation, a California maker of graphics chips. According to the SEC, in March 2000 Nvidia's president used e-mail to inform employees the firm had won a major contract to supply chips for Microsoft Corporation's new Xbox video game system. News of the contract was not announced to the public until five days following the employee e-mail. The time lag allowed the 15 individuals11 employees plus 4 people tipped by the employeesto profit by purchasing Nvidia shares prior to the public announcement of the contract. The case was relatively unusual in that the individuals charged with insider trading were low-level employees rather than high-level executives.