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Insider Trading
Buying or selling securities based on material, non-public information—illegal when it breaches a duty.
Insider Trading
Insider trading involves trading securities while in possession of material, non-public information (MNPI).
Legal vs. illegal insider trading
Legal
Corporate insiders (executives, directors) can trade their company's stock, but must:
- Report trades to the SEC via Form 4 (within 2 business days)
- Follow company trading windows and blackout periods
- Not trade while possessing MNPI
Illegal
Trading based on MNPI that you obtained through a position of trust or duty:
- An executive buying shares before a positive earnings surprise
- A lawyer trading on M&A information from a client
- Tipping friends or family with MNPI
How the SEC detects it
- Unusual trading volume or price movements before announcements
- Pattern analysis of trading around corporate events
- Tips and whistleblower programs (rewards up to 30% of sanctions)
Penalties
- Criminal: Up to 20 years in prison and $5 million fine (individuals)
- Civil: Up to three times the profits gained or losses avoided
- Disgorgement of profits
For investors
Monitoring legal insider buying (Form 4 filings) can provide useful signals about management confidence.
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Regulatory
Difficulty
Beginner
Reading Time
1 min
Related Terms
Securities and Exchange Commission
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FINRA
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Accredited Investor
An individual or entity that meets SEC financial thresholds...
Learn More
Where You'll See This
This concept appears throughout stock detail pages and financial data.