You’ve probably heard about the term "insider trading" or an "inside trader" in a negative context. But what exactly is an "insider" or a "trader," and why is there a negative connotation when these terms are used together?
Well, an "insider" generally refers to an individual who has access to "inside" information. What type of "inside" information? Here, we’re referring to the type of inside information that the general public doesn’t know about. And a "trader" generally refers to an individual that trades securities, like stocks or bonds. So, when you put the terms "inside" and "trader" together you get an individual that trades securities upon information not generally known to the public. In the United States (and many other countries), insider trading is highly illegal and violators face severe civil and criminal penalties.
In this article, we’ll take a look at what types of individuals are classified as "insiders," the differences between illegal and legal insider trading (yes, there is a such thing as legal insider trading), some famous insider trading cases, the differences between insider trading and misappropriation (an illegal activity related to insider trading), and how someone is "tipped off" to inside information. That’s a mouth full, so let’s begin.
Next, we’ll take a look at what is an "insider."