Reviewed by Gotrade Internal Analyst
You may have heard the term insider trading in financial news, often in the context of legal trouble or market scandals. But not all insider trading is illegal. Understanding the insider trading meaning and how it actually works can help you become a more informed investor.
Here is a clear breakdown of what insider trading is, when it is legal, and how everyday investors can use insider data to their advantage.
What Is Insider Trading?
Insider trading refers to buying or selling a company's stock by someone who has access to material, non-public information about that company.
An insider is typically someone with a close relationship to a company, such as a corporate executive, board member, employee, or major shareholder. Because these individuals have access to information the general public does not, there are strict rules governing when and how they can trade.
The term insider trading covers two very different situations: legal activity that is properly disclosed, and illegal activity that involves exploiting confidential information for personal gain.
Legal vs Illegal Insider Activity
Understanding legal vs illegal insider trading is essential for anyone following market activity.
Legal insider trading
Company insiders are allowed to buy and sell shares in their own company. This is entirely legal as long as the trades are reported to the relevant financial regulator within the required timeframe.
In the United States, insiders must file their transactions with the Securities and Exchange Commission (SEC). These filings are made public, which means anyone can view them.
Examples of legal insider activity include:
- A CEO purchasing additional shares in their own company.
- A board member selling shares as part of a pre-planned trading schedule.
- An employee exercising stock options granted as part of their compensation.
Illegal insider trading
Illegal insider trading occurs when someone trades based on material, non-public information and uses that information to gain an unfair advantage over other investors.
Material information is any information that could significantly affect an investor's decision to buy or sell a stock, such as an upcoming earnings surprise, an unannounced merger, or a product recall.
Examples of illegal insider activity include:
- A company executive buying shares before a major acquisition is publicly announced.
- An employee tipping off a friend about unreleased earnings results.
- A lawyer working on a merger deal trading shares of the target company before the deal is made public.
Illegal insider trading undermines market fairness. Regulators around the world actively monitor for unusual trading patterns and investigate suspicious activity.
How Insider Transactions Are Reported
In markets like the United States, legal insider transactions must be disclosed publicly. The SEC requires insiders to file specific forms depending on the type of transaction.
The most commonly referenced filings include:
Form 4: filed within two business days of a transaction. This is the most watched form among investors as it shows real-time buying and selling by insiders.
Form 3: an initial filing when someone first becomes an insider at a company.
Form 5: an annual report covering any transactions that were not previously reported.
These filings are available on the SEC's EDGAR database and are also compiled by financial data providers, making them easy to access for individual investors.
Why Investors Track Insider Activity
Many investors monitor insider transactions as part of their research process. The reasoning is straightforward: insiders know their company better than anyone else.
When a CEO buys a large number of shares on the open market using their own money, it can be interpreted as a sign of confidence in the company's future. When multiple insiders sell shares simultaneously, it may raise questions worth investigating.
What insider buying can signal
Large open-market purchases by insiders, particularly at times when the stock price is low, are often viewed positively. Insiders are unlikely to invest their own money unless they believe the company is undervalued or heading in a strong direction.
What insider selling can signal
Insider selling is harder to interpret. Insiders sell shares for many reasons unrelated to company performance, such as personal financial needs, diversification, or tax planning. A single sale is rarely meaningful on its own.
Tracking patterns across multiple insiders over time provides more useful context than any single transaction.
Limitations of Insider Data
While insider activity can be a useful signal, it should never be the only factor in an investment decision.
- Insiders can be wrong. Even executives with full access to company information make poor investment decisions. Buying or selling by insiders does not guarantee the stock will move in that direction.
- Timing is unpredictable. An insider might buy shares months before any positive catalyst becomes visible to the market. The gap between the trade and the outcome can be long enough to test any investor's patience.
- Insider data is one input among many. It works best alongside fundamental analysis, valuation metrics, and broader market context. Relying on it in isolation can lead to misleading conclusions.
- Regulations also vary by country. Not all markets require the same level of disclosure, which means insider data is more complete and reliable in some regions than others.
Conclusion
Insider trading covers both legal and illegal activity. Legal insider trading is a normal part of how executives and employees manage their ownership in a company, provided it is properly disclosed. Illegal insider trading involves using confidential information to gain an unfair edge in the market.
For investors, tracking legal insider transactions can offer useful signals about how people closest to a company view its prospects. But like all investing tools, insider data is most valuable when used as part of a broader research process, not as a shortcut.
FAQ
What is insider trading meaning?
Insider trading refers to buying or selling a company's stock by someone with access to material, non-public information. It can be legal when properly disclosed or illegal when used to gain an unfair advantage.
Who is considered an insider?
Insiders typically include executives, board members, major shareholders, and employees with access to confidential company information.
Is all insider trading illegal?
No. Insiders can legally trade shares in their own company as long as they disclose the transactions to regulators within the required timeframe.
Where can I find insider trading reports?
In the United States, insider transactions are filed with the SEC and available on the EDGAR database. Many financial platforms also aggregate this data in an easy-to-read format.
References
SEC, Insider Trading, 2026.
Investor.gov, Insider Trading, 2026.
