Rules for Insider Trading Explained

Insider Trading Explained

Insider trading is an illegal activity that has long been a problem in the stock market. In recent years, the SEC has taken steps to crack down on insider trading and has implemented a variety of rules and regulations to combat it. In this article, we will explain the rules surrounding insider trading and discuss how investors can protect themselves from being accused of insider trading. We will also discuss the potential penalties associated with breaking the rules.

Laws of Insider Trading

Insider trading is illegal in many countries, including the United States. It is considered to be unethical and can result in severe criminal and civil penalties. In order to prevent insider trading, there are numerous laws that must be followed. The most prominent of these is the Securities Exchange Act of 1934, which states that anyone who trades securities on the basis of material non-public information can be held liable for insider trading.

The Insider Trading Sanctions Act of 1984 extended these provisions, outlining a three-tiered pen alty system for those found guilty of insider trading. Depending on the severity of the violation, penalties can range from disgorgement (repayment of profits) to criminal fines and jail time. The Sarbanes-Oxley Act of 2002 also makes it easier to detect and punish insider trading by requiring companies to disclose any material changes in their financial condition in a timely manner.

In addition to these rules, the U.S. Securities and Exchange Commission (SEC) has adopted rules that require insiders to report their trades within two days of making them and has implemented regulations that prohibit specific types of trades known as “short swing” trades.

What Information Can’t Be Traded on?

Under insider trading rules, it is illegal to trade on certain material nonpublic information. This information includes any information that has not been made public, such as information about a company’s future financial results or plans for a major merger or acquisition. Any individual who is aware of such nonpublic information and trades on it can be prosecuted for insider trading. 

It is important to remember that insider trading rules do not only apply to company insiders. Even if someone is not a corporate insider, they can still be held liable for engaging in insider trading if they use nonpublic information to buy or sell securities.

When is It Legal to Trade on Insider Information?

Generally, it is illegal for a company insider to use their knowledge of the company’s activities to buy or sell stock in their own company or to advise others to do so. However, there are certain exceptions that allow insiders to trade on non-public information without breaking the law. These exceptions usually involve the use of their own capital in private transactions or when they have received prior clearance from the company’s corporate compliance program. To understand how insider trading works, one must first understand these rules and exceptions.

For example, an insider may be able to buy or sell the stock if they have previously informed their employer of the transaction and gained approval from the compliance program. This approval may require the insider to follow certain trading guidelines, such as maintaining a minimum holding period and not selling more than a certain percentage of their shares within a certain time period. Additionally, insiders are prohibited from trading based on specific non-public information, such as unpublished financial results or insider tips obtained through confidential conversations with other employees.

Are There Any Exceptions to Insider Trading Laws?

Insider trading is illegal in most countries, including the United States, and carries heavy penalties. However, there are a few exceptions to insider trading laws

In order to make sure that these exceptions are not abused, there are a few strict regulations in place. For instance, family members must receive clearance from the company’s board of directors before they can make trades based on nonpublic information. This helps ensure that the company’s interests remain protected and that insider trading does not occur. 

What Are the Penalties for Insider Trading?

Insider trading is illegal and can lead to both criminal and civil consequences. The penalties for insider trading depend on how the trade was conducted and whether it was done knowingly or with reckless disregard for insider trading rules. In the US, the penalties for insider trading may include fines of up to $5 million dollars, jail time of up to 20 years, or both. Additionally, the Securities and Exchange Commission (SEC) may require any profits made from insider trading to be returned to the company or investors that were harmed by the illegal activity.

If an individual is found guilty of insider trading, they may also face additional consequences of inside trading such as a ban on being able to serve as a corporate officer or director in any publicly traded company, suspension of their license to practice certain professions, and a lifetime ban on serving as an investment advisor. 

Understanding how insider trading works is key to avoiding these hefty punishments. Insider trading laws are designed to protect companies, investors, and the integrity of the markets by ensuring that people do not take advantage of confidential information. It is important to be aware of these laws and abide by them to avoid serious consequences.


In conclusion, understanding how insider trading works and the insider trading laws is key to staying within legal boundaries when it comes to trading on stock markets. Insider trading is a serious offense, and those who engage in such practices can face hefty fines, jail time, and a damaged reputation. If you have any doubts about whether a trade is legal or not, it’s best to consult a financial advisor or lawyer before making any decisions. While insider trading laws are put in place to ensure fair trade, they also protect investors by preventing market manipulation. It’s important to remember that when it comes to investing, transparency is key.