Table of Contents
Introduction
Insider trading has been a part of the U.S. market since William Duer used his post as assistant secretary of the Treasury to guide his bond purchases in the late 1700s. (Brudney, 1979)
Definition
The buying or selling of a company’s securities, such as stocks or options, by corporate insiders or their associates based on information about the security originating within the firm that would, once publicly disclosed, affect the prices of such securities (Brudney, 1979).
Insider trading can be illegal or legal depending on when the insider makes the trade.
It is illegal when the material information is still nonpublic- trading while having special knowledge is unfair to other investors who don't have access to such knowledge (Dolgopolov, 2008).
It is legal once the sensible information has been made public when the insider has no direct advantage over other investors. The Securities and Exchange Commission (SEC), however, still requires all insiders to report all their transactions (Dolgopolov, 2008).
The above definition of insider trading excludes transactions in a company’s securities made on nonpublic/ outside information, such as the knowledge of forthcoming market-wide or industry developments or of competitors’ strategies and products (Brudney, 1979).
Although insider trading typically yields significant profits, these transactions are still risky. Considerable trading by insiders, though, is due to their need for cash or to balance their portfolios (Dolgopolov, 2008). Nevertheless, many people still find