PostHeaderIcon Understanding Insider Trading

Insider trading has been cast in a negative light to the public. But in all actuality, insider trading is not always illegal. There are actually two types of insider trading- the legal and the illegal one.

Defining illegal insider trading

By definition, insider trading is generally the practice of trading a corporation’s stock or other securities usually done by individuals that has potential access to non-public information about the company in question.

The illegal type of insider trading is one that is done by trading stocks and other securities by insiders such as corporate managers and employees who might possess valuable internal information not yet known to the public.

Such information gives the insiders in the company quite a considerable advantage over the public who owns the same stocks and securities but do not have the same access to such information.

An example of an illegal insider trading is if a CEO of a certain company sells some of his stocks after discovering that the company may be losing a big contract in the following month that might have a great effect on the stock price.

Another example is that if a son of a CEO hears about the loss of the big contract and decides to sell his own stock shares in the company to avoid the fall in stock price.

People think that only those who belong on the upper management or work for the company who can be guilty of illegal insider trading. In fact, even friends, family members of people with access to insider information in a company can also be considered as insiders if they take part in transactions that constitute insider trading.

Defining legal insider trading

But there is also a legal type of insider trading. These can be stock trades that go in company in between employees of a company or publicly traded corporations, provided that such trades are made after inside information has been made public. This trade window or period is usually after financial statements and earnings reports of the company or corporation.

An inside trade may also be considered legal if an employee of the said company has previously created a written contract stating that he or she has planned such trade in the future.

The pre-existing contract should state the future transactions and trades and on what periods in order to be binding enough as a legal insider trade.

Examples of such contracts include those where an employee agrees to sell a certain part of stocks every month for a period of two years as part of his retirement plan.

When an employee trades his or her stocks and comes into possession of some important non-public information concerning the company, the trades that are based on the original agreement made does not constitute as illegal insider trading.


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