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Finance Dictionary and Glossary of Investment Terms
Trading by insiders; or illegal trading by insiders who trade based on insider information.
The buying or selling of a security by insiders who possess material, nonpublic information about the security. The act puts insiders in breach of a fiduciary duty or other relationship of trust and confidence.
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
Buying and selling by a company''s own officers and directors for their personal account. However, insider trading has two definitions, one bad and one good. When investors buy or sell based on material non-public information, they are engaged in illegal insider trading. For instance, your cousin is chief financial officer of XYZ Corp. and tells you over dinner that the company''s top-secret new high-tech mousetrap will make a shambles of the market. You rush out and buy the stock, which several weeks later soars on news of the new product. You sell at a big profit. What you''ve done is a crime, so don''t even try.The other kind of insider trading is much more innocuous. It refers to buying and selling by a company''s own officers and directors for their personal account. This type of trading must be disclosed to the SEC. Back to XYZ for an example: you read that the chairman, president and chief financial officer are all buying the stock heavily, so you buy some too. After all, they ought to know, right? Sure enough, a better mousetrap is announced, the stock soars, and you make a killing. Perfectly legal.Aficionados of the second kind of insider trading tend to credit buy decisions more than sell decisions. An executive might have any reason for selling, including a tuition bill for a daughter at Stanford. But when executives are actively buying the stock of their own company, in which they already have so much invested in every sense of the word, it can often mean something good is about to happen at the firm. (Of course, massive selling by insiders is a big red flag.) Insider trading of this kind is tracked by some private firms and often makes the financial press, including The Wall Street Journal.