The Basics of Illegal Insider Trading

UPDATED: May 2022

The Basics of Illegal Insider Trading - Illegal Insider trading is the purchase or sale of stocks or other securities based on information not available to the general public. It involves a direct breach of fiduciary duty or other violation of trust in which the trader uses insider knowledge to benefit financially.

The Basics of Illegal Insider Trading

Despite many high-profile incidents involving insider trading, many investors are still unsure about what it is, how it works, and why it's such a big deal. Essentially, insider trading violates key rules and regulations designed to keep the market fair for all investors.

Detailed rules regarding insider trading are complicated and generally vary from country to country. The definition of an "insider" can be significantly different under different jurisdictions. Some may follow a narrow definition and only consider people within the company with direct access to the information as an "insider." On the other hand, many also consider people related to the company officials as "insiders."

What Is Insider Trading?

Insider trading happens when someone makes an investment trade based on "material" information not publicly available. In market terms, material information is any detail that could affect a company's stock price. This information gives the individual an edge that few others have in the market. The trader must typically be someone who has a fiduciary duty to another person, institution, corporation, partnership, firm, or entity.

You can get into trouble if you make an investment decision based upon information related to that fiduciary duty if that information isn't available to everyone else.

How Insider Information Works?

Insider trading can also arise when no fiduciary duty is present, but another crime has been committed, such as corporate espionage. For example, an organized crime ring that infiltrated certain financial or legal institutions to systematically gain access to and exploit and use private information might be found guilty of such trading, among other charges for the related crimes.

Insider information allows a person to profit in some cases and to avoid loss in others. In either case, it's an abuse of someone's knowledge or position of power. It's illegal because it gives an unfair advantage to people who are "in the know." Those who have been prosecuted for insider trading include corporate officers, employees, government officials, and those who have tipped them off with insider information.

However, not all insider trading is illegal. Many factors must be considered before the Securities and Exchange Commission (SEC) will prosecute someone for insider trading. The main issues the SEC must generally prove are that the defendant had a fiduciary duty to the company and/or they intended to personally gain from buying or selling shares based upon insider information.

What Are the Penalties for Insider Trading?

Insider trading penalties generally consist of a monetary penalty and jail time, depending on the severity of the case. The SEC has moved to ban trading violators from serving as executives at publicly traded companies.


About the Author & How YOU Can Profit:  This article is the copyrighted product of the team at .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept:  Follow the trades of Insiders - CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don't:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation's Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

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