Is insider trading illegal?
By InsiderAlpha · Published · Updated
Written from SEC primary filings, with every rule cited inline. Editorial standards.
The phrase "insider trading" covers two different things. The kind in the headlines, trading on confidential information, is a federal crime. The everyday kind, directors and executives buying and selling their own company's shares, is legal, regulated, and publicly disclosed. That disclosure is the data InsiderAlpha tracks.
Legal insider trading
Directors, officers, and large shareholders may trade their company's stock as long as they:
- are not in possession of material non-public information (MNPI) when they trade, or trade under a Rule 10b5-1 plan adopted when they were not;
- report the trade on Form 4 within two business days;
- stay within the short-swing profit rule, which hands the company any profit from a matched purchase and sale inside six months.
Most companies add a layer of their own: a trading window that closes before earnings. That is company policy rather than law, and insiders are expected to follow it.
Follow insider buying without reading every filing
We read every Form 4 as it is filed and rank the insider purchases worth a look into a daily trading plan, so you do not have to open each filing yourself.
Free by email: highlights from the previous session's daily trading plan each market morning, plus a Friday roundup of the week's insider buying.
Basic reads each plan from the previous close, before the open. Compare plans or see the daily plan.
Illegal insider trading
Trading becomes illegal under Rule 10b-5 when someone buys or sells on the basis of MNPI in breach of a duty: an executive selling ahead of an earnings miss, a lawyer trading on a deal they are working on, or anyone trading on a tip they know came from such a breach ("tippee" liability). The SEC brings civil cases (disgorgement, penalties, officer bans) and the DOJ prosecutes criminal ones, with sentences that have reached double-digit years. The information does not have to come from inside the company: misappropriating confidential information from any source (an employer, a client, even a spouse) can qualify.
Why the legal trades are worth reading
Legal insider trades are disclosed within two business days, which makes them one of the few public records of what the people running a company do with its stock. Academic studies have found that open-market insider purchases were followed by positive abnormal returns on average (see are insider buys bullish?). That finding does not imply anyone broke the law. Knowing a business well is not the same as holding material non-public information about it. You can read recent purchases on the recent buys feed.
This article is informational and is not legal or investment advice.