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It's not automatically insider trading for a person involved with a company to trade in its stock. This law has a lot of subjective leeway. But it IS true that it is HARDER for people in these positions to trade stock in their company without risk.

Oversimplified, you break the law if you have information that is not yet public that would likely affect other traders' opinions of whether to buy or sell stock. But it's sort of time-sensitive and it's easier to get in trouble for short-term decisions than long-term ones.

So a CEO who sells their stock immediately before a bad quarterly earnings report? They'll likely get in trouble. A bad earnings report usually motivates people to sell. However, even if they sell 10 seconds after that report goes public, THAT is fine because now the information is public.

What if the CEO knows that next year a super-secret project is going to release and starts buying in advance? This falls much more on the subjective side of the law. It's harder to argue that if it were known a super-secret project will happen next year that investors in general would invest in the stock today. And there are still chances that between today and next year, things happen that cause the project to be canceled. So this scenario is much more grey area.

So people have a lot of strategies to avoid this. One is to announce projects to reduce how much "secret" knowledge you're leaning on. Another is to buy and sell large amounts of stock on a schedule, so you can argue you're following a pattern and not basing the decision on product announcements.

A problem with it being so subjective is it can look like a lot of times rich people get away with something that less rich people might get busted for. It's a different discussion entirely, but it's more likely that very rich people will employ lawyers and accountants who work together to assess their risk of insider trading charges whereas less wealthy people are more likely to go on their own thoughts.

1. Most high level execs receive their bonus in the form of stock option. A stock option is the option to purchase a stock at a price that is set(usually below current market at the time the option is awarded). They can exercise these options at any time because the price is set before they receive them and it is part of their compensation.
2. When an exec(or some other person who has valuable insider information) wants to transact(buy or sell) on the stock they have insider info for they are generally required to announce their intention and the price at which they are selling several weeks in advance. There are also "black out dates" where they are not allowed to buy or sell, such as around earnings announcements(since earnings are a regular event that often has a big impact of stock price).

Generally people with inside knowledge like that are quite limited in when and how they can trade stock in the very company that they are the leadership of.

The last time that I worked for a major public company, upper management could only trade stocks in anything through a specific broker, on a specific account known to the company. Trading stock in the company itself could only be done in specific time windows AND those trades were delayed by a month. All of this to prevent accusations of insider trading.

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Insider trading isn't illegal. Certain types of insider trading are. The main difference: illegal insider trading involves information not available to the public. A CEO can sell or buy stock as they please so long as they aren't tying it to info unavailable to the public.

Employees with over 10% ownership are considered insiders. They have to report stock sales of that company to the SEC within 2 days of a transaction. There is also a 6 month blackout after transactions. If they buy shares, they can't sell them for 6 months.

The Sarbanes Oxley Act of 2002 put C-level execs under a lot of scrutiny and it still remains. The government has a strong interest in preventing another Enron from happening.

As with any law and/or regulation everything comes down to enforcement. And I'm sure there are plenty of execs that are willing to roll the dice on sliding a transaction by using privildged info.

lol

> However, even if they sell 10 seconds after that report goes public, THAT is fine because now the information is public.

I have a minor nitpick: at my company (and I think this is pretty common if not the law) the trade window doesn't open until several business days after the report goes public. That gives the market plenty of time to digest the information, trade on it, trade on others' trades, etc.

This is true and a product of me oversimplifying.

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A few things:

• Knowledge has to be material, eg. significant to company's prospects/fortunes

• All trades by C-level execs, board members have to be reported, date and quantity

• There is a reason that shares are often granted by board at set times in lieu of top level people buying on open market

• Similarly, top execs often have set recurring sales set up for their spending, asset diversification purposes. So a CEO might automatically sell 1000 shares the Friday after each earnings call so it's easy to see that it's a recurring trade and not a sale because something is wrong

• Companies have "Quiet Periods" where employees, execs, board members, etc. CANNOT trade. These are in weeks leading up to quarterly earnings, before a major acquisition, before a major lawsuit concludes, and such.

If we're nitpicking, I choose this part:

"It's not automatically insider trading for a person involved with a company to trade in its stock"

It is insider trading, just not the illegal kind. In fact the definition of insider trading is basically a person involved with a company trading in its stock. There are additional rules and scrutiny tied to insider trading and illegal insider trading is often just referred to as insider trading but, nonetheless the general concept of insider trading is not illegal.

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insider trading isn't illegal because it makes things unfair, it's illegal because it's theft - misappropriation of company info for personal benefit. if I give my golf buddy a heads up my company is acquiring AcmeCo next week and he trades on that and hands me a fat sack of cash at the bar, then that's illegal. I'm using company info to help my friend and deriving a personal benefit from it.

it's illegal because I hurt my shareholders - my buddy bought AcmeCo, which drove the price up doing so, and my company had to pay a higher price for AcmeCo as a result. it's a bit like taking the company car for a joy ride, the shareholders are fine with you having a company car, just not destroying it wrecklessly.

if my friend, on the other hand, happened to be on a train with my CEO, and he saw a note fall out of the CEO's briefcase, a note which told him AcmeCo would be acquired next week and he traded on that info, then that is fine, really. shareholders were still harmed and they might not be happy with the CEO, but nothing was stolen, no duty was breached.

to bring this back to your question - they do a couple of things to limit the perception of trading on material info for personal benefit.

• there are blackout periods around quarterly reports where people who work for the firm can't trade.
• they buy/sell in a process-oriented fashion (around the same time every year)
• they abstain from trading when there is material information being discussed, like a merger, even outside of blackout periods
• they invest for the long term by buying the actual stock and not, like, short dated out of the money call options the day before a surprise earnings announcement.

at the end of the day, the C suite of a company is going to be highly scrutinized in their trading activity to make sure they aren't doing anything funny like that, and the above is the accepted way of doing so.

This is all true and insider trading law always feels to me like it's being strung together in real time any time the boundaries are tested.

In practice, many executives of companies with a significant portion of their wealth tied up in stock will not sell as a tax mitigation measure, and instead borrow using their holdings as collateral to service their cash needs, so the question comes up less often than perhaps it otherwise would.

Yeah, the thing I mentioned about "selling in patterns" is based on something I vaguely remember a while back regarding Zuckerberg. He did a big selloff right before Facebook/Meta announced some big embarrassment and people were certain he'd face insider trading, but "this fits a pattern of seasonal sales" was the excuse I saw some people throw around and I never heard anything about it again.

Personally at that level I think it'd be cheaper to hire a US Senator to do the buying/selling for you, they're immune to insider trading and they can count their cut as campaign money.

What I never understood is that company executives get to make projections as part of their earning calls which heavily influences the stock price the minute after. Doesn't this allow full price manipulation even when these insiders did follow protocol to sell their stock. (10b5-1 I think?) The CEO of a company I used to work at would consistently hold his stock after providing lower projections than market expectations. We would always end up beating those earnings projections, but the process would repeat. Once or twice a year, we would announce higher projections and the CEO would be scheduled to sell the following day with a nice price bump. Meanwhile the rest of us were in a regular blackout period following earnings.

Yep, the vast majority of public companies impose blackout periods on insider stock transactions

>it can look like a lot of times rich people get away with something that less rich people might get busted for

a scandalous and far-fetched idea!

Short version? They can't.

Long version? Can you give a more explicit example of what you are asking? Beascue your question doesn't make sense completely.

Nearly all CEO/C-Suite members of major companies have no active involvement in the trading of their stock, to avoid this exact issue.

Meaning, when they buy and when they sell are pre-determined by the trading windows the company establishes. C-suite members don't "buy" stock in the traditional sense, they get stock grants as part of their compensation package, or some employee stock purchase program, again the timing of which they have no control over.

How MUCH they sell may have some leeway although I'm sure there are guidelines. But C-Suite execs likely hold stock as long as they can while it's going up, and they may be able to sell more (or less) in the defined periods based on some insider knowledge, although again they can't control the timing so as to avoid any insider trading rules.

The only other way a C-suite exec can buy their own stock is part of say in index or other fund (which I'm sure doesn't count when they sell) or if they buy common stock on the market.

It's only in this last case where there might be some "insider" trading but I'm not aware of any situation where a CEO or other exec has purchased common stock of their own company, to sell later based on inside knowledge. I'm sure it's happened, but it's going to be very uncommon as this action would cause ALL KINDS of red flags to be raised.

Another restriction in addition to other comments, a lot of companies have rules saying senior executives have to maintain a certain amount of stock to hold their position. This means they often can't sell substantial proportions of their holding or else they lose their position and have to wait until they leave the company.

Let's say they need to hold a million shares and get 100 thousand a year as part of their compensation, yes they can convert those 100k into cash, but the remainder is tied up.