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Insider Trading

Making investment decisions based on information that is not yet public. Although trading based on this type of inside information does occur, it is against regulations.

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

Additional Comments:

Insider trading is a term that most investors have heard and usually associate with illegal activities. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders — officers, directors, and employees — buy and sell stock in their own companies.

When corporate insiders trade in their own securities, they must report their trades to the Securities and Exchange Commission (SEC). Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of significant nonpublic information about the security.

Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

Insider trading is illegal only when a person bases his or her trade on information that is unavailable to the public. It is also illegal to give insider information to another person, whereby that person makes equity trades based on that information. There is very little illegal insider trading since those who practice it are so easily caught and almost always face significant fines and jail time.

For example, Martha Stewart was convicted of lying to the SEC regarding insider trading information. She was told by her friend Sam Waksal that his company’s (ImClone) cancer drug had been rejected by the Food and Drug Administration (FDA) before this information was made public. The rejection by the FDA was very damaging to the company and resulted in a dramatic drop in share price. However, Martha Stewart avoided this drop in share price because she sold her shares before the FDA news was made public.

Related Terms:

Inside Information
Relevant information about a company that has not yet been made public. It is illegal for ...

Privileged information
Information that is not available to the public. ...

Regulation FD
SEC regulation adopted in 2000 that eliminated the practice of selective disclosure. ...

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