Corporate insiders, such as executives, managers and directors, regularly buy and sell securities issued by the companies they manage. Experienced market participants often monitor and view these transactions as possible trading signals. Such observations may help you to determine whether a stock might take off or fall in price.
Because an insider typically has access to a company’s confidential information, there is a fiduciary duty of trust, as noted by Investor.gov. Insiders cannot trade a security while they owe a duty of trust unless they first disclose the confidential information to the public.
What information can be used when trading?
Once a company releases “inside” information publicly, it is permissible to buy or sell a stock without concern that the trade is based on nonpublic material information. The company, however, must have already disclosed the information through a press release, news report or the U.S. Securities and Exchange Commission’s website.
Piecing together information gathered from news reports, market chatter and rumors before placing a trade does not usually result in an allegation of insider trading. As noted by Kiplinger magazine, if you overhear an insider speaking about his or her company’s next acquisition while in a public place, you may also trade without violating SEC rules.
How might a legal trade raise wrongdoing allegations?
If a corporate insider provides you with material nonpublic information, the fiduciary duty may then pass on to you. An allegation that you breached that duty may require proof that a transaction you made did not violate SEC insider trading rules. It is critical that investors and traders speak with a knowledgeable lawyer who can evaluate the specifics of their unique situation before attempting any trade that is non-standard.