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Insider trading happens when people who have access to confidential information about a company use that to profit off its stock. These insiders include folks like the corporate officers and members of the board of directors.

Historically, there have been countless cases of unscrupulous insiders benefitting at the expense of unsuspecting shareholders. For example, suppose an insider knows that some news is about to come out that will cause a company’s stock price to fall. They could go into the market and sell their shares to someone who doesn’t know about the news. Likewise, if there’s news coming out that will drive the price higher, they could buy stock from an unsuspecting shareholder.

In order to prevent this type of activity, the government has developed numerous regulations and laws. One requires that, when a company insider decides to buy or sell shares in their company’s stock, they must publicly disclose it to the U.S. Securities and Exchange Commission (SEC). That gives outside investors a chance to profit, too.

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