Insider trading is the trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company.
In various countries, trading based on insider information is illegal. This is due to unfairness, as one investor with some inside information could potentially make far larger profits, or at least, make profits that a typical investor would not make.
The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, some economists have argued that insider trading should be allowed and could, in fact, benefit markets.
Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. However, most jurisdictions require such trading be reported so that these can be monitored.
In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade.
The rules around insider trading are complex and vary significantly from country to country and enforcement is mixed.
The definition of insider can be broad and may not only cover insiders themselves but also any person related to them, such as brokers, associates and even family members. Any person who becomes aware of non-public information and trades on that basis may be guilty.