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The Difference Between Legal and Illegal Insider Trading

“It takes a crook to catch a crook.”

— FDR about Joseph P. Kennedy (father of JFK) on why

he was appointed inaugural chairman of the SEC.

Now that you’ve seen the benefits of insider trading and what it can do for your portfolio, remember that all of the prior examples are not only safe ways to increase your wealth, but they’re legal ways as well.

The SEC has gone out of its way to ensure that insiders have the opportunity to voice their opinion on their firm’s prospects with their wallet. At the same time, the SEC comes down hard on insiders who use their knowledge to profit before the public can.

That’s because the SEC has two critical criteria for illegal insider trading. An illegal insider trade is one that is done with materially important information. This could be something like whether or not a company will make its estimated earnings for the next quarter, or whether a massive dividend or share buyback is going to be implemented.