Insider Trading
Insider trading is the illegal practice of buying or selling securities based on material, non-public information, or tipping others to trade on such information. It violates securities laws and can result in civil and criminal penalties.
🎬 Video Explanation
Exam Tip
Insider trading = trading on MATERIAL, NON-PUBLIC info. Both tipper AND tippee liable. Criminal penalties up to 20 years!
What is Insider Trading?
Insider trading occurs when someone trades securities based on material, non-public information (MNPI) or shares such information with others who trade on it. This illegal practice undermines market fairness and investor confidence.
Key Definitions
| Term | Meaning |
|---|---|
| Material Information | Information that would influence an investor's decision |
| Non-Public Information | Not yet disclosed to the general public |
| Insider | Anyone with access to MNPI |
| Tipper | Person who shares MNPI |
| Tippee | Person who receives and trades on MNPI |
Who Can Be an "Insider"?
| Category | Examples |
|---|---|
| Corporate Insiders | Officers, directors, 10%+ shareholders |
| Temporary Insiders | Attorneys, accountants, bankers working on deals |
| Tippees | Anyone receiving MNPI from an insider |
| Misappropriators | Anyone who steals or misuses confidential information |
Examples of Material Non-Public Information
- Unannounced merger or acquisition
- Quarterly earnings before release
- FDA drug approval/rejection
- Major contract wins or losses
- Executive departures
- Dividend changes
- Significant litigation outcomes
What Makes It Illegal
| Element | Requirement |
|---|---|
| Material | Would affect a reasonable investor's decision |
| Non-Public | Not available to general public |
| Breach of Duty | Tipper breaches duty of trust |
| Personal Benefit | Tipper receives benefit (even reputation) |
Penalties for Insider Trading
| Penalty Type | Potential Consequences |
|---|---|
| Civil | Disgorgement of profits + up to 3x penalty |
| Criminal | Up to 20 years in prison |
| Fines | Up to $5 million (individuals), $25 million (entities) |
| SEC Enforcement | Cease and desist, industry bars |
Legal Insider Trading
Some insider trading is LEGAL when properly disclosed:
- Corporate insiders trading their company's stock
- Must report trades on Form 4 within 2 business days
- Pre-planned trades under Rule 10b5-1 plans
- Must not possess MNPI when trade is planned
Exam Alert
Insider trading is a FEDERAL CRIME. Both the tipper and tippee can be liable. Information must be both MATERIAL and NON-PUBLIC. Form 4 must be filed within 2 days for legal insider trades.
Study This Term In
Third-party resources · We may earn a commission from purchases.
SIE Exam Prep 2025-2026: Complete Review + 510 Questions and Detailed Answer Explanations for the FINRA Securities Industry Essentials Exam (6 Full-length Exams)
By Test Prep, Newstone
$27.55 · 
Take courses on Udemy
Prep course on Achievable
Study guide on MometrixThird-party resources · We may earn a commission from purchases.
Kaplan Series 7 License Exam Manual, 2nd Edition - Comprehensive Exam Prep for the Series 7 General Securities Representative Exam
By Kaplan Financial Education
$79.37 ·
Online course on Mometrix
Practice exams on ExamEdgeTake courses on Udemy
Third-party resources · We may earn a commission from purchases.
Series 66 Study Guide 2025–2026: 10 Full-Length Practice Tests, 1600+ Realistic Questions, Detailed Answer Explanations, and Proven Strategies to Pass the Uniform Combined State Law Exam
By Bean, Charles K.
$29.99 ·
Study guide on MometrixPrep course on AchievablePractice exams on ExamEdgeRelated Terms
SEC (Securities and Exchange Commission)
The SEC is the U.S. federal agency responsible for enforcing securities laws, regulating securities markets, and protecting investors from fraud and market manipulation.
FINRA
FINRA (Financial Industry Regulatory Authority) is a self-regulatory organization that oversees broker-dealers and their registered representatives, administering qualification exams and enforcing securities rules.
Your AI study companion · 10 free interactions a day
Stay Updated
Get free exam tips and study guides delivered to your inbox.