Buying or selling a company's securities based on material non-public information - illegal in most jurisdictions, but also used to describe the legal monitoring of insider transactions filed with regulators.
Insider trading in its illegal form involves trading on information that has not been disclosed to the public - a CEO selling shares before announcing a profit warning, or a banker buying target company stock before a merger announcement. The legal framework in the US (SEC Rule 10b-5) and equivalent laws in other jurisdictions prohibit this because it undermines market fairness: those without access to the information cannot make informed decisions.
However, 'insider trading' is also used colloquially to describe the entirely legal process of tracking required regulatory filings. In the US, corporate officers, directors, and major shareholders must report their trades within two business days on SEC Form 4. Academic research has consistently found that insiders' own purchases of their company's stock - particularly when multiple insiders buy simultaneously - outperform the market on a risk-adjusted basis. The logic is straightforward: insiders have the best possible understanding of their company's prospects and are most likely to buy when they believe the stock is undervalued.
For active traders, monitoring Form 4 filings (freely available at SEC.gov and on aggregators like InsiderMonitor and OpenInsider) provides a signal that complements fundamental and technical analysis. Insider selling is less informative than buying - insiders sell for many reasons (diversification, estate planning, lifestyle spending) but typically only buy because they believe the stock will rise. Clustered buying by multiple insiders at the same time is one of the stronger contrarian signals in equity markets.
Worked Example
A company's CFO, COO, and two independent directors each purchase shares on the open market within a week, filing Form 4 disclosures with the SEC. The combined purchase totals USD 2 million at USD 45 per share. This cluster buying - despite the stock's recent 30% decline from its high - signals insider confidence at current levels. Traders who track Form 4 filings note the signal and conduct further fundamental research.