what is insider trading 
insider trading involves trading in a public company s stock or other securities by someone with non public material information about the company insider transactions are legal if the insider makes a trade and reports it to the securities and exchange commission but insider trading is illegal when the material information is still non public those who commit insider trading face harsh consequences so it s important to know what it is and how to avoid it if you own company shares and have information that can affect other investors investopedia mira norianunderstanding insider tradingthe u s securities and exchange commission sec defines illegal insider trading as material information is any information that could substantially impact an investor s decision to buy or sell the security non public information is information that is not legally available to the public the question of legality stems from the sec s attempt to maintain a fair marketplace an individual with access to insider information would have an unfair edge over other investors who do not have the same access and could potentially make larger and thus unfair profits than their fellow investors the securities exchange act of 1934 was the first step in requiring the disclosure of company stock transactions directors executives or anyone else who has information or who holds more than 10 of any class of a company s securities are considered insiders by the sec 2anyone who becomes an insider must file sec form 3 initial statement of beneficial ownership of securities within 10 days of assuming an insider role 3if an insider makes a transaction they must file form 4 statement of changes in beneficial ownership within two business days of making the transaction this form serves to notify the public that an insider acted on a security 4sec form 5 annual statement of changes in beneficial ownership of securities is required no later than 45 days after a company s fiscal year ends the sec requires its filing only if one or more transactions exempted from form 4 were not reported during the year 2if you meet the definition of an insider and file the forms trading your company shares is called an insider transaction it is only considered illegal insider trading when you don t follow the rules illegal insider trading includes an insider by sec definition not submitting the required forms after making a transaction it also includes passing along material non public information before it is made publicly available for example suppose you work for xyz company and learn that it is about to post losses in its quarterly report which can affect investors you tell a friend who owns shares in the company and they sell their shares a few days before the report is published and share prices drop right after it is you and your friend may be guilty of insider trading even though neither of you is classified as an insider by definition you acted on information that could affect other investors when they didn t have the information 1examples of insider tradinginsider trading is nothing new it has been going on for as long as stock markets have existed however there are some notable recent examples worth mentioning directors of companies are not the only people who have the potential to be convicted of insider trading for example in 2003 martha stewart was charged by the sec with obstruction of justice and securities fraud including insider trading for her part in the 2001 imclone case stewart sold close to 4 000 shares of biopharmaceutical company imclone systems based on information from peter bacanovic a broker at merrill lynch bacanovic s tip came after imclone systems chief executive officer ceo samuel waksal sold all his company shares this came around the time imclone was waiting on the food and drug administration fda for a decision on its cancer treatment erbitux shortly after these sales the fda rejected imclone s drug causing shares to fall 16 in one day the early sale by stewart saved her a loss of 45 673 however the sale was made based on a tip she received about waksal selling his shares which was not public information after a 2004 trial stewart was charged with lesser crimes of obstruction of a proceeding conspiracy and making false statements to federal investigators stewart served five months in a federal corrections facility 5in september 2017 former amazon com inc amzn financial analyst brett kennedy was charged with insider trading authorities said kennedy gave fellow university of washington alumni maziar rezakhani information on amazon s 2015 first quarter earnings before the release rezakhani paid kennedy 10 000 for the information in a related case the sec said rezakhani made 115 997 trading amazon shares based on the tip from kennedy 6