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Insider Trading

Definition

The definition of "insider trading" is not always easy to define. It is a term that conjures images of financiers being led away in cuffs. However, the definition of insider trading includes both allowed and dis-allowed activity. The allowed version is when corporate insiders (officers, directors, and employees) buy and sell stock of their own company within the specified rules -- the biggest of which is that they usually must report their trades to the SEC. Disallowed insider trading is the buying or selling of a security in breach of a fiduciary duty while in possession of material, nonpublic information about the security. This may include tips to others, trading when in possession of confidential information of a corporation pre-public release, government employees and vendors servicing the company trading in inside information and the general use of material non-public information in violation of a fiduciary duty.

Using the term Insider Trading :

The mosaic theory states that a trader combining non-public, non-material information with public material information may trade on that information as that is the core of the investment analysis and trading function.

Pay Special Attention To :

SEC Rule 10b5-1 rule permits persons to trade in certain instances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith (this is from the SEC website).

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Related terms

Investment Banking , Acquisitions , Trading , Mergers , Tender Offer , Investment Risk , Wall Street , Trading Places