The legal version of Insider trading is when corporate insiders, officers, directors, and employees buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the necessary financial regulators.
In the United States (U.S.) it’s the Securities Exchange Commission (SEC) where insiders have reports that they must file. The SEC is a financial regulator that’s enforced by the U.S. securities law and has rules to protect the investment from the effects of insider trading.
The SEC has agreements with many countries throughout the world and this gives the SEC access to people who violate U.S. securities law outside the U.S. Insiders in the U.S. are required to file a Form 4 with the U.S. SEC when buying or selling shares of their own companies.
An “insider” is any person who possesses at least one of the following:
1) Access to valuable non-public information about a corporation this makes a company’s directors and high-level executives insiders.
2) Ownership of stock that equals more than 10% of a firm’s equity
If you’re also an employee who gets offered a stock options package that lets you buy shares of the company for a discount. You’re going to be involved in key changes at the organisation, which means you’ll have a better gauge than most as to the financial health of the business.
Just don’t cross that fine line that exists between legal and illegal insider trading. Considering that insiders know more about a company than others, they must follow a protocol for trading shares so that they don’t unfairly profit from their position. A securities law allows company officials to schedule their stock market trades in advance so as not to give the impression of improprieties.
An insider is legally permitted to buy and sell shares of the firm and any subsidiaries that employ him or her. However, these transactions must be properly registered with the SEC and are done with advance filings.