The legal kind
Officers, directors and holders of more than 10% of a share class may buy and sell their company’s stock. The law attaches conditions. They must report each transaction on Form 4 within two business days under Section 16(a) of the Exchange Act. Under Section 16(b), any profit from a purchase and sale within six months of each other belongs to the company and can be recovered by it or by a shareholder on its behalf, which is why insiders rarely trade in and out. Companies also impose their own trading windows and pre-clearance. When these conditions are met and the insider is not acting on material non-public information, the trade is legal and public.
The illegal kind
Illegal insider trading is buying or selling a security on the basis of material non-public information in breach of a duty of trust or confidence, under Section 10(b) of the Exchange Act and Rule 10b-5. It covers insiders, people they tip and outsiders who misappropriate information, for example from an employer or a client. Penalties include disgorgement, civil fines of up to three times the profit and criminal prosecution. Rule 10b5-1 gives a defence to anyone who trades under a plan adopted before they knew the information.
The distinction matters when reading filings. A Form 4 shows a legal, disclosed trade. The study of such trades, sometimes called insider sentiment, asks whether disclosed buying and selling by insiders has historically been followed by returns, which is a different question from whether a particular trade was lawful.
Questions
Is it legal for executives to buy their own company’s stock?
Yes, as long as they report it on Form 4 within two business days and are not trading on material non-public information. Companies usually restrict when insiders may trade to windows after earnings.
What is the short-swing profit rule?
Section 16(b) of the Exchange Act: any profit a Section 16 insider makes from a purchase and a sale of the company’s stock within six months of each other is recoverable by the company, regardless of intent. It is why insiders tend to hold what they buy.
Are the trades on InsiderTell illegal insider trading?
No. They are transactions that insiders reported to the SEC as the law requires. InsiderTell ranks and measures disclosed trades; it does not and cannot judge whether any trade used non-public information.