According to the Securities and Exchange Commission (SEC), illegal insider trading generally involves buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
The legal version of insider trading occurs when corporate insiders - officers, directors, and employees - buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must register their stock portfolios with the SEC and report all purchases and sales on a monthly basis. Rules governing insider trading are meant to minimize the unfair advantage that insiders have because of their privileged access to strategic nonpublic information.
Interpreting what insider transactions mean can be difficult. Executives buy and sell stock for many reasons, and those reasons are not necessarily tied to their expectations for the company. Executives may sell stock to raise cash to pay a child's tuition bill, for example.