What Is Insider Trading?
Insider trading is the illegal practice of buying or selling securities based on material, nonpublic information. This type of activity involves a person who has access to confidential information about a company’s financial performance and uses it for their own personal gain. Insider trading can be done by corporate insiders such as directors, officers, and employees; family members; friends; or anyone else with privileged knowledge of the company’s affairs. It is considered unethical because it gives an unfair advantage to those in possession of this insider information over other investors who do not have access to this data.
The Securities Exchange Commission (SEC) enforces laws that prohibit insider trading activities in order to protect investors from being taken advantage of by people with inside knowledge. The SEC requires companies to disclose any material changes in their finances so that all investors are aware when making decisions regarding investments. Penalties for violating these regulations include fines, jail time, disgorgement (the return of profits made through illegal trades), and suspension from certain types of business activities related to securities transactions.