Insider Trading refers generally to the buying or selling of a corporate security while in possession of material information about that corporation that is not known to the public.
Often, this information is obtained by corporate insiders who have access to this material information based on their position inside the organization. That insider then buys or sells the securities based on that information. Insider trading may also occur when a corporate insider “tips” the nonpublic information to someone outside of the organization, and that person then buys or sells securities. In that case both the “tipper” of the information and the “tippee” (the person receiving the information) are liable for illegal insider trading. Insider trading is unlawful because trading while having special knowledge is unfair to other investors who don’t have access to such knowledge. An example of illegal insider trading is when an executive at Company A learned, prior to a public announcement, that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.