What is insider trading exactly?
Insider trading is any trading done on material non-public information relating to an instrument.  If my sister, who works for a drugs testing company, tells me that stage 3 trials of a drug look like they will fail and I trade on that information (probably by shorting a company's stock) that is insider trading. If an employee of that firm trades on that same stock knowing that the trials are likely to fail that is too. If an employee of that company trades on the stock without knowing that information that is NOT insider trading. If I know from an insider I met at the pub that a large orange producer has seen a fall in production due to a blight and I trade on oranges futures, even though I am not directly trading in the stock it is still insider trading. I mentioned that the information must be material, that means that it must have the potential to move the market; if I know that a firm is going to increase profits by 10% this year it is not material if analyst expectations are for a similar rise. You are right that small scale insider trading, such as by employees and their families, is relatively unregulated and unchecked but directors and C-level employees of a firm are required to publish all and any dealings that they have in the stock and several have been caught and penalized for insider trading. edit: http://www.sec.gov/spotlight/insidertrading/cases.shtml details some cases, many involving director and C-level employees, that the SEC has prosecuted recently. Incidentally I work in financial fraud monitoring and we use an analytic based on previous days' trades and today's news (i.e. when the information becomes public) to identify traders who might either be indulging in or receiving orders to trade on insider information. Essentially this works by looking for large changes in position against an instrument that later has material information releases relevant to it. One final thing to think about: given that being caught will generally cause perpetrators to go to prison and be banned from director level jobs and/or trading for life as well as a large, life-changing fine and a massive loss of reputation not many people with insider information want to risk trading on it, myself included. The CEO of a public company can, and often does, buy (and sell) the stock of his company. In fact, frequently the stock of the company is part of the compensation for the CEO. What makes this legal and fair is that the CEO files with the SEC an announcement before he buys (or sells) the stock. These announcements allow us 'in the dark' people enough warning ahead of time.  See, for example, the trades of UTX stock by their public officers. As for trading on information about other companies, if I am not mistaken... that is why Martha Stewart wound up in prison. So, yeah, it does happen. I hope it is caught more often than not.  On a related note, have you seen the movie 'Wall Street' with Charlie Sheen and Michael Douglas? "One scenario described in the original question -- a non-insider who trades after informal conversations with friends, where no insiders directly benefit from any such disclosure -- might not be illegal.  (IANAL -- this is just my personal interpretation of articles in the news recently.) http://www.bloomberg.com/news/articles/2015-10-05/insider-trading-cases-imperiled-as-top-u-s-court-spurns-appeal the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit -- something more than the nurturing of a friendship ... In a 1980 case the Supreme Court rejected the idea of “a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.""" Using inside sensitive information about corporate and using the same to deal in securities, before the exchanges are made aware of the information. Its mostly used in derivatives to get maximum returns on investmens, but Its illegal in all the exchanges
Then I'll cite it as the last paragraph of step 3 in getting started. He says everything is insider trading and that's bullshit; if he had any interest in giving real advice he would define insider trading as trading with material, non-public information as it says in all the statutes.  It's the same meaningless nonsense as the paragraph before that, where he says good investors don't time the market but know when to get in and get out. Those are the same things at the level he has described them; it would take a book with actual investing advice like Ben Graham's The Intelligent Investor or A Random Walk Down Wall Street for an actual view into investment. "The fallacy in your question is in this statement: ""The formulas must exist, because prices can be followed real time."" What you see are snapshots of the current status of the stock, what was the last price a stock was traded at, what is the volume, is the price going up or down.  People who buy and hold their stock look at the status every few days or even every few months. Day traders look at the status every second of the trading day.  The math/formula comes in when people try to predict where the stock is going based on the squiggles in the line. These squiggles move based on how other people react to the squiggles.  The big movements occur when big pieces of news make large movements in the price. Company X announces the release of the key product will be delayed by a year; the founder is stepping down; the government just doubled the order for a new weapon system; the insiders are selling all the shares they can. There are no formulas to determine the correct price, only formulas that try to predict where the price may go." Depends on your time scale, but generally, I don't think it would work. What you'd really be betting on in this case is mean-reversal, which does not hold true in the equity universe (atleast not in the long run). If you look at the historical prices of the S&P, you'll notice it increases in terms of absolute dollar value. On the short term, however, if you feel the market has significantly undervalued or overvalued a security, then mean-reversal might be a reasonable bet to make. In that scenario, however, it seems to me that you are really looking for a volatility trade, in which case you might want to consider a straddle position using options. Here, the bet you'd be making is that the price at expiration will be inside a certain band (or outside the band, depending on your position). Well that's because you're trying to apply the same rules that apply everyone else to government officials. Don't be silly.  On a serious note, I find this one of the most offensive abuses of power in America today. Insider trading has been illegal in various forms since 1933. It is an enormous conflict of interest. A government official has the ability to enrich themselves in an almost unlimited way from trading on insider information. I don't believe the average American even realizes this. How there can be any justification of this is beyond me. It is a crime. No question about it. So if stealing is illegal for the general public, how can it be ok for public officials?  And they wonder [public trust in government](http://www.people-press.org/2017/05/03/public-trust-in-government-1958-2017/) is at all-time lows. Shares are partial ownership of the company. A company can issue (not create) more of the shares it owns at any time, to anyone, at any price -- subject to antitrust and similar regulations. If they wanted to, for example, flat-out give 10% of their retained interest to charity, they could do so. It shouldn't substantially affect the stock's trading for others unless there's a completely irrational demand for shares. SEC Form 3 and SEC Form 4 are filed when insiders make share/derivatives acquisitions, transfers, sells and buys There is a time limit AFTER the action where they can be filed, such as 12 business days, so this can be a substantial amount of time after the effect on the market, depending on your strategy. You can aggregate these forms from SEC sources or from third party websites and services. In some cases, types of insider trading are permissible at certain intervals, so if you learn about when certain shares become unlocked, you can try to predict what insider actions will be and share price movements around those times. "Secret formulas are legal, ""privileged information"" is not. And that may be the whole point. People are allowed to trade stocks profitably if doing so results only from their skill. A ""secret formula"" (for evaluating information) is part of that skill. But having ""privileged information"" is not considered skill. It is considered an unfair, illegal advantage. Because company officials (and others) with privileged information are 1) not permitted to trade stocks while that information is privileged and 2) are not allowed to share that information with others. Inevitably, some do one or the other, which is why they are prosecuted. ""Raj"" took the process to new highs (or lows). He not only ""dealt"" in privileged information, he PAID for it. Anything from a new car or house to $500,000 a year in cash. In essence, he had a bunch of strategically placed ""spies"" inside or close to corporations including one on the board of Goldman Sachs, ""selling out"" their companies, and thereby practicing a form of corporate ""treason.""" No, but insider information would have tipped them off on the timings of when to time some of their actions... possibly planning shorting it ahead, all kinds of who-diggery that those financial wizards can do to make shit tons of money off stocks / companies losing money.