What Is Insider Trading?
Insider trading is buying or selling a company's stock by people close to it, like managers and board members. It can be perfectly legal or a serious crime, depending on the details.
Legal insider trading
Company leaders own shares and are allowed to trade them. In the US they must report their trades publicly, usually within two business days. Many sell regularly on pre-set plans to pay taxes or diversify.
Illegal insider trading
Trading on important secret information is illegal. For example, buying shares because you know about a takeover before it is announced. Passing the tip to a friend who trades is also illegal. Penalties include fines and prison.
Why investors watch insider buying
Insiders sell for many reasons. But they usually buy for one reason: they think the price will rise. Several insiders buying at once can be a meaningful signal.