Insider Trading
Illegal insider trading means buying or selling a security on the basis of material, nonpublic information in breach of a duty of trust. Legal insider trading also exists: company insiders may trade their own shares if they follow disclosure rules.
Knowing about a merger, an earnings miss or a drug approval before everyone else would be a huge advantage — which is exactly why trading on that knowledge is banned. Insider trading rules protect the idea that everyone trades on the same public information. This entry explains what makes insider trading illegal, how it differs from legal insider buying and why traders watch both.
- Category
- Market Structure
- Reading time
- 4 min
- Also called
- Illegal insider trading, Trading on inside information, Insider dealing
- Updated
Insider trading in plain words
Illegal insider trading generally means trading a security, in breach of a fiduciary duty or relationship of trust, on the basis of material, nonpublic information.1
Because it undermines confidence in fair markets, the SEC treats it as an enforcement priority.1
Regulation FD requires companies that disclose material nonpublic information to certain market professionals or holders to make it public too.2
How to tell if trading is illegal, step by step
Is the information material?
Would it likely move the price?
Is it nonpublic?
Not yet released to the market.
Was there a duty?
Employees, advisers and tippees can owe one. See Fiduciary Duty.
Was it used to trade?
Trading or tipping on it breaks the rule.
Legal insider trades
Officers trading their own shares must report them. See SEC Filings: 10-K, 10-Q and 8-K.
When in doubt, don't
Penalties include fines and prison.
Worked examples
Example 1 — An illegal tip
IllegalAn employee learns of an unannounced takeover at $75 a share and tells a friend, who buys at $50.
| Information | Material and nonpublic |
| Duty breached | Yes (employee to company) |
| Profit at $75 | $25 a share — illegal |
Trading in breach of a duty on material, nonpublic information is illegal insider trading.1
Example 2 — Legal insider buying
LegalA CEO buys 10,000 shares on the open market after earnings are published and files the required report.
| Information public? | Yes |
| Reported? | Yes |
Insiders may trade their company's shares when they don't use nonpublic information and they follow reporting rules. See SEC Filings: 10-K, 10-Q and 8-K.
Example 3 — Selective disclosure
Breaks Reg FDA company privately tells a few analysts that sales will miss forecasts.
| Selective disclosure | Prohibited |
| Fix | Publish the information broadly |
Regulation FD requires public disclosure when an issuer shares material nonpublic information with market professionals.2
Illegal vs legal insider trading
| Aspect | Illegal | Legal |
|---|---|---|
| Information used | Material, nonpublic | Public |
| Who | Anyone with a duty or a tip | Officers, directors, big holders |
| Reporting | Hidden | Disclosed to the SEC |
| Market view | Fraud | Watched as a signal |
Why traders care about insider activity
Following insider buying
Legal purchases can signal confidence.
Compliance
Employees must follow blackout periods.
Spotting suspicious moves
Odd volume before news draws attention. See Spoofing, Layering and Wash Trading.
Earnings season
Information is most sensitive then. See Earnings Season.
Advantages and disadvantages
Advantages
- Rules protect fair, equal access to information.
- Legal insider filings give useful signals.
- Enforcement deters abuse.
Disadvantages
- Hard to detect and prove.
- Grey areas around what is material.
- Rules differ between countries.
Going deeper
Read as far as you need. Each level builds on the one before it.
Material means price-moving
Beginner
Information is generally material if a reasonable investor would consider it important, such as earnings, mergers or regulatory decisions. See Earnings Surprise.
Use or possession
Intermediate
The SEC's 2000 rules clarified when liability arises from a trader's use or knowing possession of material nonpublic information, and when family or personal relationships can create a duty.2
Trading plans
Advanced
Rule 10b5-1, adopted alongside Regulation FD, lets insiders set up pre-arranged trading plans that can provide a defence when trades follow the plan.2
Common mistakes
Thinking only executives are covered
Friends and family who get tips can be liable.
Trading on rumours from insiders
A tip is still inside information.
Confusing all insider trades with crime
Reported insider trades are legal.
Assuming crypto is exempt
Insider cases have involved crypto assets too.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Illegal insider trading uses material, nonpublic information.
- It requires a breach of duty or trust.
- Legal insider trades are reported to the SEC.
- Regulation FD bans selective disclosure.
- The SEC treats it as an enforcement priority.
Frequently asked questions
Is all insider trading illegal?
What are the penalties?
Can you follow insider buying?
Further learning
- Front Running
A related abuse by brokers.
- Spoofing, Layering and Wash Trading
Other illegal practices.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Insider Trading (glossary) (opens in a new tab) Checked .
- SEC. Final Rule: Selective Disclosure and Insider Trading (Regulation FD) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.