Not all insider trading is illegal. But Insider trading the illegal variety is defined as that of any securities transaction made when a person involved in the trade has non-public, material information, and uses this information to violate his or her duty to maintain the confidentiality of such knowledge by using it for financial gain.
The illegal insider trading occurs when a securities transaction of purchase or sale of stocks is influenced by knowledge that only a small group of people inside of the company whose stocks are being traded would know about.
This obviously gives the insider trader an unfair advantage that allows them to profit from information about a potential up or downtick in a company’s trading value before others in the market.
The insider can be a person that has a relationship with a business that makes them privy to information that has yet to be released to the public. From that insider information which can be material that if its release would affect a company’s stock price. For example, the announcement of a tender offer, a pending merger, a positive earnings report, the pending release of a new product, etc.
And obviously the reason insider trading is illegal is because it gives the insider an unfair advantage in the market. Putting the interests of the insider above those to whom he or she owes a fiduciary duty, and allows an insider to artificially influence the value of a company’s stocks.
