insider trading | Definition

Doc's CJ Glossary by Adam J. McKee
Course: Criminal Law

Insider trading, in the context of criminal law, is the act of trading financial securities like stocks, bonds, or options using confidential, non-public information.

Let’s break down insider trading to understand it better. Imagine you’re at a game of poker, but you have an unfair advantage: you can see everyone else’s hand. This is much like insider trading. It occurs when an individual has access to private information about a company’s financial status or future plans that isn’t yet available to the public. This information can be about upcoming mergers, acquisitions, earnings reports, or anything that might affect the company’s stock price.

Just like seeing other players’ hands in poker gives you an unfair advantage, insider trading provides an unfair edge in the stock market. It’s like you’re cheating in a game where everyone else is playing fair.


There are two main types of insider trading: “Classic” and “Tipper-Tippee.” The classic version is when a person within a company, such as an executive or a board member, uses privileged information to trade stocks. They’re on the inside, hence the term “insider trading.”

On the other hand, “Tipper-Tippee” involves a person outside the company. In this case, someone inside the company shares non-public information with a friend or family member. The receiver of this information, known as the “tippee,” then uses this information to trade stocks. This sharing of confidential information can even extend further, with the tippee sharing the information with others, creating a chain of illegal trading.

Why Is It Illegal?

Why can’t you trade with the knowledge you have? The reason is simple: it’s not fair. In a healthy stock market, all investors should have the same access to information. This ensures equal opportunity for everyone to make wise investment decisions.

However, such trading disrupts this balance. It lets a select few make profitable trades at the expense of the general investing public who are in the dark about the non-public information.

Moreover, it undermines trust in the financial market. Investors need to have confidence in the fairness of the market. If people believe that insider trading is widespread, they might be less willing to invest. This lack of trust can destabilize the market and hamper economic growth.

The Consequences of Insider Trading

Engaging in insider trading is a serious crime and has severe consequences. Individuals caught insider trading can face heavy fines and imprisonment, and may have to return any profits made from illegal trades. Additionally, the company where the insider trading took place could also be held liable. It could face both criminal and civil charges and may have to pay substantial penalties.

In conclusion, this practice is a serious offense in criminal law. It refers to using non-public information to gain an unfair advantage in trading securities, such as stocks, bonds, or options. It’s not just about individual insiders: friends or family who receive tips can also be implicated. Insider trading undermines trust in the market and has severe consequences for individuals and companies involved.

[ Glossary ]

Last Modified: 05/26/2023

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