The buying or selling of a publicly traded security by someone who has access to material, non-public information about the company.
Illegal insider trading involves trading based on material information not yet available to the public, such as advance knowledge of earnings, mergers, or regulatory decisions. The SEC actively investigates and prosecutes insider trading cases, with penalties including fines up to $5 million and imprisonment up to 20 years for individuals. Legal insider trading occurs when corporate insiders (officers, directors, and large shareholders) buy or sell their own company's stock after filing the required disclosures with the SEC (Form 4). Tracking legal insider purchases can be a useful investment signal, as insiders have deep knowledge of their company's prospects.