What is insider trading exactly?
Insider trading is any trading done on material non-public information relating to an instrument.  If my sister, who works for a drugs testing company, tells me that stage 3 trials of a drug look like they will fail and I trade on that information (probably by shorting a company's stock) that is insider trading. If an employee of that firm trades on that same stock knowing that the trials are likely to fail that is too. If an employee of that company trades on the stock without knowing that information that is NOT insider trading. If I know from an insider I met at the pub that a large orange producer has seen a fall in production due to a blight and I trade on oranges futures, even though I am not directly trading in the stock it is still insider trading. I mentioned that the information must be material, that means that it must have the potential to move the market; if I know that a firm is going to increase profits by 10% this year it is not material if analyst expectations are for a similar rise. You are right that small scale insider trading, such as by employees and their families, is relatively unregulated and unchecked but directors and C-level employees of a firm are required to publish all and any dealings that they have in the stock and several have been caught and penalized for insider trading. edit: http://www.sec.gov/spotlight/insidertrading/cases.shtml details some cases, many involving director and C-level employees, that the SEC has prosecuted recently. Incidentally I work in financial fraud monitoring and we use an analytic based on previous days' trades and today's news (i.e. when the information becomes public) to identify traders who might either be indulging in or receiving orders to trade on insider information. Essentially this works by looking for large changes in position against an instrument that later has material information releases relevant to it. One final thing to think about: given that being caught will generally cause perpetrators to go to prison and be banned from director level jobs and/or trading for life as well as a large, life-changing fine and a massive loss of reputation not many people with insider information want to risk trading on it, myself included. The CEO of a public company can, and often does, buy (and sell) the stock of his company. In fact, frequently the stock of the company is part of the compensation for the CEO. What makes this legal and fair is that the CEO files with the SEC an announcement before he buys (or sells) the stock. These announcements allow us 'in the dark' people enough warning ahead of time.  See, for example, the trades of UTX stock by their public officers. As for trading on information about other companies, if I am not mistaken... that is why Martha Stewart wound up in prison. So, yeah, it does happen. I hope it is caught more often than not.  On a related note, have you seen the movie 'Wall Street' with Charlie Sheen and Michael Douglas? "One scenario described in the original question -- a non-insider who trades after informal conversations with friends, where no insiders directly benefit from any such disclosure -- might not be illegal.  (IANAL -- this is just my personal interpretation of articles in the news recently.) http://www.bloomberg.com/news/articles/2015-10-05/insider-trading-cases-imperiled-as-top-u-s-court-spurns-appeal the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit -- something more than the nurturing of a friendship ... In a 1980 case the Supreme Court rejected the idea of “a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.""" Using inside sensitive information about corporate and using the same to deal in securities, before the exchanges are made aware of the information. Its mostly used in derivatives to get maximum returns on investmens, but Its illegal in all the exchanges
At any given time there are buy orders and there are sell orders.  Typically there is a little bit of space between the lowest sell order and the highest buy order, this is known as the bid/ask spread.  As an example say person A will sell for $10.10 but person B will only buy at $10.00.  If you have a billion shares outstanding just the space between the bid and ask prices represents $100,000,000 of market cap. Now imagine that the CEO is in the news related to some embezzlement investigation.  A number of buyers cancel their orders.  Now the highest buy order is $7.  There isn't money involved, that's just the highest offer to buy at the time; but that's a drop from $10 to $7.  That's a change in market cap of $3,000,000,000.  Some seller thinks the stock will continue to fall, and some buyer thinks the stock has reached a fair enterprise value at $7 billion ($7 per share).  Whether or not the seller lost money depends on where the seller bought the stock.  Maybe they bought when it was an IPO for $1.  Even at $7 they made $6 per share. Value is changing, not money.  Though it would be fun, there's no money bonfire at the NYSE. I do not believe that this was a case of insider trading. As an example, one of the executives sold only 4% of his total. Now consider that between the 3 of them, the amount sold was only $1.8M. These amounts are minuscule and are in no way indicative of any misconduct. My opinion. As others have said, it simply makes you a part owner. Even if you have ethical objections to a company's behavior, I'd argue that investing in it and using the proxy votes to influence the company's decisions might be even more ethical than not investing. * In the 70's, 80's and early 90's there were pinstriped brokers who took orders over the phone from people who wanted to buy and sell. They had a huge competitive advantage over the rest of the market due to the lack of transparency in the market's order book. Therefore you got screwed every time you wanted to trade, ie the markets were less efficient because transaction cost was high. Transaction cost is = bid-ask spread + how much you get screwed by the market insiders.  * In the 90's and early 00's there were automated trading systems that allowed people to conduct trades directly with computers, aka Algorithmic Trading. The markets were more efficient, because spreads became tighter as more people were able to enter the market on this platform (e.g. [Lightspeed](http://lightspeed.com)). The ability for market insiders to screw the general market was lessened because the exclusive access to the market's order book was eroded. Of course some Algorithmic Trading operations had a huge competitive advantage because they had great systems and great people. However it wasn't talked about because those who new about it were making a killing and keeping their mouths shut.   * Then in the mid to late 00's there was co-located algorithmic trading on very fast systems, aka HFT, a natural evolution of Algorithmic Trading. Now market insiders (= people with enough resources to field co-located machines and the the engineer/traders to manage them) expanded their  competitive advantage by discovering the market's order book (as they are able to see orders in a fraction of a second and then act on those orders). However to retract this natural efficiency in the markets you would need to create some kind of set of rules to even out the playing field. How can that be done?   ** Option 1) Transaction tax would just make the markets less efficient by increasing the cost of buying and selling. A generally bad thing because it discourages traders (to put money into stocks), which is of course how the capital markets are supported.   ** Option 2) Create rules to ensure everyone sees the same information at the same time and then permit anyone to use whatever technology they want to act on that information, so that the most efficient trading operations win.    ** Option 3) Create some artificial environment where no-one is allowed to have an advantage:  ensure everyone sees the same information at the same time, ensure everyone has the same technology, and ensure that the people who manage the systems have the exact same experience and intelligence etc...      Of course #2 is how it works, and it is the meritocratic basis which underpins Capitalism. I don't see why people have a problem with it. Calling insider trading theft is a pretty big stretch. I think it should remain illegal as it's not great for markets and undermines investor faith, if the people that bought stock from this guy wanted the stock they would have gotten it anyways. Material Information means that any information that can reasonable affect the share price of the company [upward or downward] as looked by the investors. The idea is to provide a level playing field to all investors. Hence it forces people having material information not to trade when they have this information that is not yet disclosed. Yes it happens all the time and laws are quite stringent. There is monitoring of share activity by regulators ... hence most of the times the companies come out with their own guidelines and top & senior management is prohibited from trading in their own company’s shares for pretty much round the year except few windows the company decides is safe. Now it may not be possible to monitor every small material info, but any large spike of stocks after certain announcements is investigated by regulators to verify any undue gains. For ex a person who never trades suddenly buys large qty of shares and it goes up and he sells again ... etc In principle I agree with you. However the allegation is that the people managing the IPO withheld crucial information and informed insiders against investing. Maybe the allegations are false, but it should still be looked into. If the IPO shared crucial details with insider traders while keeping it from the public at large that would affect the investor's risk-assessment of a stock, that's insider trading and should be punished accordingly. "You seem to have a little confusion over terminology that should be cleared up: You are calling this ""day-trading"" Day-trading is the term for performing multiple trading actions in a single day. While it appears that the COO has performed a buy and a sell on the same day, most people would consider this a 'single trade'. In reality, it seems that the COO had 'stock options' [a contract providing the option for the holder to buy stock at a specific price, at some point in the future], provided as part of his compensation package. He decided or was required to 'exercise' those options today. This means he bought the shares using his special 'option price'. It is extremely common for employees who exercise stock options, to sell all of the resulting stock immediately. This is very different from usual day-trading, which implies that he would have bought stock in the morning at a low price, and then sold it later at a high price. You are calling this 'insider trading'. That term specifically often implies some level of unethical behavior. In general, stock options offered to executive employees are strictly limited in how they can be exercised. For example, most stock option plans require employees to wait x number of years before they can exercise them. This gives the employee incentive to stay longer, and for a high-level executive with the ability to strongly impact company performance, it gives incentive to do well. Technically you are correct, this is likely considered an 'insider trade', but given that it seems to have been a stock option exercise, it does not necessarily imply that there was any special reasoning for why he did the trade today. It could simply be that today was the first day the stock option rules allowed him to exercise. As to your final question - no, these profits are the COO's, to do with as he likes." "Yes I know that. Then please tell me how this article relates to business. I doubt anyone even clicked at it, it's a link to ""stock picks"" subreddit which then links to ""crypto"" trading blog. This is definitely nto business related post even if everyone is downvoting me to hell.  Sidenote: This subreddit is full of spam and almost nothing relevant to actual business can be found so this is a good moment to unsubscribe which I have just done." The amount of money spent on compliance to prevent insider trading alone probably dwarfs the cost it may impose on the markets.   But separately from that, the information that insider has is obviously going to get out, right? If it were spread through word of mouth heterogeneously and not released to all market participants at once, you eliminate or greatly diminish the value of ultra high frequency trading, which has become a useless arms race that probably doesn't add much value to society.  In the world of information, there's no clear marking that says *public* and *non-public*, but rather many shades between. I just don't think it's really worth pursuing except in the case of actual company insiders. We should be focusing our limited energy elsewhere, in my opinion. "I don't have any sympathy for Wall Street insiders, and am greatly in favor of giving law breakers real sentences.  But look, any facebook buyer that feels ""cheated"" here needs to take a good long look in the mirror. It's not illegal to sell something at a preposterous, outrageously high price. You can claim that you were ""mislead"" by the seller, but by doing that, you abdicate your personal responsibility to think through your own decisions carefully, and come to your own understanding of what they're worth. If the primary basis for buying facebook stock was that *Mark Zuckerberg* said $38 was a good buy, and you couldn't take a few minutes out to decide if that made sense for yourself, for your own sake you should really get out of the stock market." "Once upon a time I ran my own micro hedge fund for a very short time.  I can't recall the term commonly used in the industry for such info, but a few individuals, including the prime brokerage firm's founder, offered information of questionable character.  I refused to trade on any of it, not only because of the borderline illegality, but also because I didn't trust any of it... seemed to be more rumor mill type nonsense than anything else.  Moreover, if they already have that info, then it's already up/down... so it then goes the reverse direction as they take profits.  As is commonly said even in normal investor circles: ""buy the rumor, sell the news.""" In the UK if you come into the possession of the information in a way that isn't available to the general public that's insider trading. It even states this in section 7, and uses the example of if you observe something like a burning factory as a member of the public, that's not insider information as anyone could have seen it.   If you attended a meeting or somehow got hold of private information not yet made public, then it would be considered insider information.   Its possible the OP got this information through public observation but considering the nature of the information it's highly unlikely More shares mean less volatility because it takes a larger number of trades, a larger number of shares per trade, or a combination of both to raise or lower the stock price. Institutional investors (mutual funds, pensions, hedge funds, other investment firms, etc) are the sorts of organizations with the large amounts of money needed to move a stock price one way or the other.  But the more floating shares there are in a company, the harder it is for one or two firms to move a stock price.  A company with fewer floating shares wouldn't require as many trades (or as many shares per trade) to see wider swings in price. When it comes to stock price, insider trading isn't the same as manipulation.  In the (surprisingly few) cases of insider trading that are prosecuted, it tends to be an individual (or small group) with early access to information that the broader market doesn't have being able to buy or sell ahead of the broader market.  Their individual sales are seldom if ever enough to noticeably move a stock price.  They're locking in profit or limiting a loss.  Manipulation might (but doesn't always) precede insider trading, if misinformation (or truth) is released for the purpose of creating a situation that can be profited from via a trade or trades. A practical issue is that insider trading transfers wealth from most investors to the few insiders. If this were permitted, non-insiders would rarely make any money, and they'd stop investing. That would then defeat the purpose of the capital markets which is to attract capital. A moral issue is that managers and operators of a company should act in shareholders' interests. Insider trading directly takes money from other shareholders and transfers it to the insider. It's a nasty conflict of interest (and would allow any CEO of a public company to make ton of money quickly, regardless of their job performance). In short, shareholders and management should succeed or suffer together, so their interests are as aligned as possible and managers have the proper incentives.