Definition of Insider Trading

I am sure you have heard the term insider trading hundreds of times but you may not really know the exact definition of insider trading. Technically insider trading is the purchase and sale of securities of firms by their officers, directors, large shareholders or advisors/acquaintances who came into contact with these people and information about these firms. Insider trading covers not only the illegal transactions that are brought to your attention by the media, but also millions of other legal transactions made by executives and other insiders of the firm.

This is not going to be a boring insider trading article. Let me give you some interesting facts about insider transactions. Every year insiders file more than 200,000 reports with the SEC detailing their transactions and holdings of their companies’ stock and derivatives.

Raj Rajaratnam thinking

In most years there were more than 250 thousand insider trading reports. That is around 1000 reports per day. Who are these insiders and why are they trading so much? In most cases these insiders are officers and directors of the companies. In fact in 55 out of 100 reports, the insider is a director of the company, and in 52 out of 100 reports the insider is an officer of the company. I know they add up to more than 100. It is because some officers are also directors of the company. In only 10% of the cases the insiders are more than 10% owners of the company. Finally in 4% of the cases, insiders are advisors, lawyers or other people who are not officers, directors, or large shareholders of the company. Here is the distribution of the insiders from 2004 to 2009.

As you can see the distribution of insiders is pretty stable over the years. Amazing…

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