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Insider trading is a term used to describe the buying or selling of securities by individuals who have access to non-public information about a company. This type of trading can be legal or illegal, depending on the circumstances. In this post, we will explore the two types of insider trading and provide examples to help you understand the difference.

Legal Insider Trading

Legal insider trading occurs when insiders, such as executives, directors, or employees of a company, buy or sell securities based on information that is available to the public. These individuals are required to report their trades to the Securities and Exchange Commission (SEC) and are prohibited from trading on non-public information.

For example, if an executive of a company buys shares of their company’s stock based on publicly available information, this is considered legal insider trading. The executive may have knowledge of the company’s future plans or financial performance, but as long as this information is available to the public, the trade is legal.

Illegal Insider Trading

Illegal insider trading occurs when insiders trade securities based on non-public information. This type of trading is prohibited by law and can result in severe penalties, including fines and imprisonment.

For example, if an executive of a company buys shares of their company’s stock based on non-public information about an upcoming merger, this is considered illegal insider trading. The executive has an unfair advantage over other investors who do not have access to this information, and their trade is considered fraudulent.

Another example of illegal insider trading is when an outsider, such as a friend or family member of an insider, trades on non-public information obtained from the insider. This is known as “tipping” and is also illegal.

Conclusion

In conclusion, insider trading can be legal or illegal, depending on the circumstances. Legal insider trading occurs when insiders trade on publicly available information, while illegal insider trading occurs when insiders trade on non-public information. It is important to understand the difference between these two types of trading to avoid legal consequences and maintain the integrity of the financial markets.

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