Definition
In Korea, insider trading is illegal under the Financial Investment Services and Capital Markets Act: it means using important company information that the public doesn't have yet, usually by a company's officers, employees, or other close insiders, to trade stocks, either to pocket unfair profits or to dodge losses. It is a classic financial crime in which traders start the race from different starting lines.
Taking an exam after seeing the answer key
Imagine a footrace where one runner starts right next to the finish line. No one would call that race fair. Everyone has to line up at the same starting line and run when the starting gun fires. The stock market works the same way. Millions of investors compete in one giant arena, judging a company's value based on public information.
But some news, like a successful new drug or a huge export deal, reaches people inside the company first, before it hits the press. If someone with that material nonpublic information quietly buys shares ahead of everyone else, they can make a fortune when the stock price jumps.
It works the other way around too. Say an insider learns the company is on the verge of bankruptcy. They dump their shares early and avoid the loss all by themselves. Ordinary investors, who have no idea what's coming, get stuck with the damage. That's no different from sneaking a look at the answer key before walking into the exam room. It's plain cheating.
It's not just company executives who get punished
You don't have to be the CEO or a company employee to count as an insider. Certified public accountants who audit a company's books, lawyers who help with its lawsuits, and bank officers who review its loans all learn business secrets through their work. The law keeps a close eye on them too.
They're often called "quasi-insiders," and Korean law punishes them just as strictly as company employees. The law goes even further. People who get the secret directly from an insider, such as family, friends, or acquaintances (the "first-tier tippees"), and then trade on it can't escape punishment either.
Maybe you thought, "My friend says his company has great news coming. Why not buy a little?" If you knew the information wasn't public yet and traded anyway, you can be punished directly, along with the person who told you. First-tier tippees face criminal penalties. Someone who hears the tip secondhand or later down the chain can still be hit with administrative fines for "market disruption" under Korean rules.
A bit more precisely: why does the state crack down so hard?
Some people wonder, "Why is it such a big deal for the economy if an insider buys a few shares of their own company?" But if insider trading becomes widespread, ordinary investors start to feel, "The game is rigged anyway," and they may leave the stock market.
Without investors, honest and promising companies can't raise the money they need to launch new businesses. Money doesn't flow to where it's needed, and the whole economy can lose energy.
That's why Korean financial regulators use computer surveillance systems to spot unusual trades. They can impose fines or refer cases to prosecutors. In court, offenders can face fines worth several times their illegal profits, plus prison sentences. The lifeblood of a capitalist market is fairness that every participant can trust.
Common misconceptions
Company employees can't buy their own company's stock at all.
Employees can trade their company's stock by following the rules and using properly disclosed information. What's illegal is trading on "material nonpublic information" that the world doesn't know yet. Note that in Korea, executives and major shareholders must also follow separate rules, such as returning short-swing profits and reporting their shareholdings.
Where you meet it
Just before news of a failed clinical trial for a new drug hit the headlines, a company executive sold all of their shares and avoided a big loss.
The day before a major merger with a large corporation was announced, an employee who was preparing the paperwork bought a large number of shares and made a big profit.
In one sentence
Insider trading means using secret company information that hasn't been made public to trade stocks. It's illegal because it destroys the fairness of the market.