Define Insider Trading

There are many controversies associated with the definition of "Insider Trading". However, broadly speaking insider trading can be divided in to two categories.

1. Legal Insider trading and
2. Illegal Insider trading

Legal Insider trading

According to the SEC, when company's directors, officers, employees or an insiders involve in the activity of buying and selling of their company's securities like stocks, call put options etc. they should report their activities to SEC prior to buying or selling. It is also mandatory to fill up the Form 3, Form 4 and Form 5 by insiders.

Illegal Insider trading

Illegal insider trading according to the SEC is selling or buying of company's securities that breach the relationship of confidence and trust or breaching the fiduciary duty when 'they' posses the information which are not known to the general public. Insider trading law also cover giving information in the form of "tips" and person who buy or sell the securities based on these "tips"

Some of the examples of Insider trading according to SEC:

1. After learning or discovering some important information, corporate directors, employees or officers trade on their company's securities
2. The "Tippers" are the receivers of important non public information that may include members of family, friends, associated or any other person. After receiving the 'Tip' they trade the securities.
3. Staff or the owners of brokerage firm, banks, printing press who receives information from the company prior to their announcement happens to trade that company's securities.
4. Government employees who know the non public information as a part of their duty and trade that company's securities.
5. Other persons who take advantage of non public information.