Insider Trading 101: A Beginner’s Guide


Are you curious about the world of finance and investing? Have you ever heard the term 'insider trading' thrown around but don't quite understand what it means or why it's illegal? Look no further, because we have created a beginner's guide to insider trading. In this post, we'll break down exactly what insider trading is, how it works, and why it's such a big deal. By the end of this read, you'll be well on your way to becoming an expert in insider trading 101!

Insider Trading 101: A Beginner’s GuideSourceMoneyGuru-

Introduction to Insider Trading

Insider trading is the act of trading a company's stock or other securities by someone who has access to non-public, material information about the company. The reason this is illegal is because it gives the insider an unfair advantage over other investors who don't have access to this information.SourceMoneyGuru-

This can be detrimental to the market as a whole because it can create an imbalance of supply and demand for the company's securities, which can lead to artificially inflated prices. It can also give the insider an unfair profit if they sell their securities after the public learns of the material information and the prices go up.SourceMoneyGuru-

Insider trading is punishable by both civil and criminal penalties. In the United States, the Securities and Exchange Commission (SEC) investigates and prosecutes cases of insider trading. The SEC has a number of different enforcement tools at its disposal, including administrative proceedings, civil injunctions, and monetary penalties.SourceMoneyGuru-

Criminal charges for insider trading are brought by the Department of Justice (DOJ). The DOJ can bring charges under federal law or under state law in certain circumstances. Federal charges are typically brought when there is a pattern of illegal insider trading or when there is a significant amount of money involved. State charges are usually only brought when there is one instance of insider trading that was not part of a larger scheme.SourceMoneyGuru-

The penalties for insider trading depend on whether the case is investigated and prosecuted civilly or criminally. Civil penalties can include disgorgement (giving up ill-gotten profits), civil monetary penalties, and injunctions (orders from the court preventing future insider trading). Criminal penalties can include jail time, fines, and forfeiture of profits.SourceMoneyGuru-

What is Insider Trading?

Insider trading is the trading of a company's stock or other securities (such as bonds or options) by individuals with access to nonpublic information about the company. In most cases, insider trading is illegal.SourceMoneyGuru-

The U.S. Securities and Exchange Commission (SEC) defines insider trading as 'a potential conflict of interest that arises when a person who has access to confidential information about a company trades the stock of that company.' The SEC goes on to say that 'insider trading undermines investor confidence in the fairness and integrity of the markets.'SourceMoneyGuru-

There are two types of insider trading: legal and illegal. Legal insider trading occurs when insiders trade based on information that is not public and is not in breach of their fiduciary duty to the company. Illegal insider trading occurs when insiders use nonpublic information to gain an unfair advantage in the market. This type of insider trading is prohibited by law.SourceMoneyGuru-

Most jurisdictions have laws prohibiting insider trading, but enforcement can be difficult because proving intent can be difficult. The U.S. passed its first law against insider trading in 1934, called the Securities Exchange Act. This law prohibits people from using material, nonpublic information or misrepresenting material information to make trades.SourceMoneyGuru-

Why is Insider Trading Important?

Insider trading is important for several reasons. First, it can give an investor an unfair advantage over other investors who do not have access to the same information. Second, insider trading can result in potential losses for those who do not have access to the same information. Finally, insider trading can lead to investigations and prosecutions by regulatory agencies.SourceMoneyGuru-

How to Track Insider Trading

Insider trading is a type of securities fraud that occurs when an individual trades a security while in possession of material, nonpublic information. In order to make informed and profitable trades, investors rely on the public disclosure of information by companies. When insiders—such as company officers, directors, or large shareholders—trade based on information that is not available to the public, they undermine the level playing field essential to our free market system. Illegal insider trading violates federal securities laws and can result in civil and criminal penalties.SourceMoneyGuru-

The U.S. Securities and Exchange Commission (SEC) defines insider trading as “a potential violation of securities law that may occur when a person who has access to important inside information about a company buys or sells stock in that firm’s shares.” Under federal law, it is illegal for any person or entity to engage in insider trading—buying or selling stocks, bonds, or other securities based on material, nonpublic information.SourceMoneyGuru-

There are two elements to illegal insider trading: 1) possessing material, nonpublic information; and 2) using that information to trade in securities (stocks, bonds, etc.). If both of these elements are met, then the trader may be liable for violating insider trading laws. The key question is whether the trader knew—or should have known—that he or she was in possession of material, nonpublic information at the time of the trade.SourceMoneyGuru-

Knowing whether someone has illegally traded on inside information can often be difficult to prove. The SEC and other regulatory bodies have implemented policies and procedures to detect insider trading, including using advanced surveillance systems that monitor for abnormal trading activity. Additionally, the SEC may investigate tips from whistleblowers or complaints from investors who believe they have been harmed by insider trading.SourceMoneyGuru-

If insider trading is suspected, the SEC will investigate to determine if a violation has occurred and pursue any necessary civil or criminal charges as appropriate. Individuals and entities found guilty of illegal insider trading may face disciplinary actions, including fines, disgorgement of profits and/or imprisonment, depending on the severity of the violation.SourceMoneyGuru-

Top 3 Websites to Track Insider Trading

There are many websites that track insider trading, but the top three are Insider Score, Morningstar, and Yahoo Finance.SourceMoneyGuru-

Insider Score rates companies based on their corporate governance and how transparent they are with their insider trading information. Morningstar provides anIn-depth look at a company's financials, including insider trading activity. Yahoo Finance's 'Inside Trader' feature gives users an overview of recent insider buying and selling activity.SourceMoneyGuru-

Using one or more of these websites is a great way to keep track of insider trading activity and make sure that you are investing in companies that are governed well and have nothing to hide.SourceMoneyGuru-


Finviz is a free financial visualization tool that allows users to easily view stock data. The website provides charts, tables, and maps that can be customized according to the user's preferences. Finviz also offers a variety of features, such as the ability to create custom portfolios, back-test strategies, and receive real-time alerts.SourceMoneyGuru-


GuruFocus is a website that tracks the stock trades of corporate insiders. This information can be useful for investors because it can give clues about a company's future prospects.

To find out more about how to use GuruFocus, check out this beginner's guide.


Insider trading is the illegal practice of using non-public information to make stock trades. This can be done by insiders, who are people who have access to this information because of their job or position, or by outsiders who have illegally obtained the information. Either way, it is illegal and can result in heavy fines and jail time.

There are a few different ways that insider trading can take place. One way is when an insider buys or sells stock based on material information that has not been made public yet. This is called tipping. Another way is when an insider gives someone else material, non-public information so that they can trade on it. This is called trading on inside information.

Insider trading is illegal because it gives the insider an unfair advantage over other investors who do not have access to the same information. It also hurts the integrity of the markets because it undermines investor confidence.

If you are thinking about engaging in insider trading, you should know that it is a serious crime that comes with heavy penalties. If you are caught, you could face up to 20 years in prison and/or a fine of up to $5 million dollars. It is not worth the risk!


We have gone through the basics of what insider trading is, why some people choose to engage in this practice, and how such trades can be monitored. Though there is no definitive answer as to whether or not insider trading should be legal, it remains an important issue for all financial market participants. As a beginner investor, understanding the nuances and rules behind insider trading will surely help you make smarter decisions when it comes to your investments.




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