I used to think that insider trading is illegal.
The first time I heard about it was in a scandal involving top ranking official. The official through his agent bought substantial shares of stock of a certain company at a low price and after receiving a tip from a company insider sold his stock at a much higher price. It was then that I learned that as a stock market anomaly is real.
Insider trading is the selling or purchasing of a security by someone who have access to material information about the issuer or the security that is not generally available to the public.
Material information about a company is information which would have significant effect on the market price of the securities of that company when disclosed to the public.
Insider trading can be legal or illegal depending on the time the sale took place.
It is legal when the transaction was made after the information was made public. Corporate insiders such as officers, directors and employees can buy securities from their own company.
It is illegal when the sale happened before the material information was made public. For example, a company Chief Executive Office (CEO) sells stock after discovering that the company will be losing a big government contract. This is unfair to investors who do not have access to this information. Tipping to gain access to vital information is prohibited. It is a breach of trust and confidence.
Trading by company insiders is highly regulated by the Securities and Exchange Commission as it undermines investor confidence in the fairness and integrity of the securities market . It violates the principle of transparency.
There is really a thin dividing line between a legal and an illegal insider trading. Thus, it is difficult to police. Whether we like it or not, insiders have due advantage as they know the ins and outs of their company than outsiders. Your broker or financial advisor can provide you tips on how to invest as the insiders do.
As an investors you need to do your homework. Become your own financial advisor. Read stock investing basics here.