Insider Trading
Insider trading refers to buying or selling a company's stock by individuals with access to material non-public information (MNPI). While illegal insider trading involves trading on MNPI, legal insider trading occurs when executives trade through proper channels and report via Form 4.
The Trader's Take
The Signal
Legal insider trading reported on Form 4 can signal executive confidence or concern. Open market purchases are historically strong bullish indicators.
The Noise
Scheduled 10b5-1 plan trades are pre-planned and less indicative of current sentiment. Automatic exercises and tax withholdings are administrative.
Actionable Insights
- 1Focus on open market purchases (Code P) as the strongest signal.
- 2Distinguish between discretionary trades and 10b5-1 plan trades.
- 3Look for cluster buys where multiple insiders purchase simultaneously.
- 4Filter out administrative transactions like gifts and tax withholdings.
Regulatory Context & Context
Common Misconceptions
Not all insider trading is illegal—executives can legally buy and sell their company stock.
Trading on publicly available information is not insider trading, even if done by insiders.
The term "insider" has a specific legal definition under Section 16.
Frequently Asked Questions
Is all insider trading illegal?
No. Legal insider trading occurs when company executives buy or sell stock through proper channels and report their transactions on SEC Form 4. Illegal insider trading involves trading based on material non-public information.
What is the penalty for insider trading?
Civil penalties can be up to three times the profits gained or losses avoided. Criminal penalties include fines up to $5 million for individuals and prison sentences up to 20 years.
How is insider trading detected?
The SEC uses sophisticated surveillance systems, data analysis, and tips from whistleblowers to detect unusual trading patterns before major announcements.