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LSDefine
Simple English definitions for legal terms
insider trading
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A quick definition of insider trading:
Insider trading is when someone buys or sells a company's stocks using secret information that is not available to the public. This is not allowed because it is unfair to other people who want to buy or sell the stocks. People who work for the company, like bosses or important employees, are not allowed to use this secret information to make money for themselves. If they do, they can get in trouble with the law. The government watches for this kind of behavior and can punish people who break the rules.
A more thorough explanation:
Insider trading is when someone buys or sells a company's stocks using information that is not available to the public. This information is usually confidential or material non-public information that only people who work for the company or have access to the company's secrets know about. This is considered a breach of the individual's fiduciary duty.
For example, if a CEO of a company knows that the company is going to announce a big merger, they might buy a lot of the company's stock before the announcement is made. This is illegal because they are using information that is not available to the public to make a profit.
Insiders who "tip" their friends about material non-public information may also be liable for insider trading. For example, if a friend of the CEO knows about the merger and buys stock based on that information, they are also breaking the law.
The Securities and Exchange Commission (SEC) requires companies to report trading by corporate officers, directors, or other company members with significant access to privileged information. If someone is caught insider trading, they can face criminal charges and fines.