Investors buy or sell stocks of companies by making their own conclusions about the company's growth and prospects and profitability and dividends and other benefits to investors from the information and accounts available to public through the companies' reports and balance sheets or press announcements made in public. These are available to anyone equally as it is in public domain. That is normal investment decision and normal trading .
However some people connected with the company are privy to some information before they are made public . If such people indulge in buying or selling the shares of that company in large volumes and to their advantage, then that is insider trading. Usually the top executives of the company, the chartered accountants auditing the company accounts , those who are close to these people have all chances to get the private and confidential information. Eve in the public made accounts and reports all may not be divulged and there may be some confidential matters only very few people know in detail. Such people can exploit that advantage and trade on the company's stocks for their benefit or benefit to their close people. That is insider trading.
If an employee or top executive of a company buys or sells the shares of his company , that alone does not constitute insider trading. Even an employee can buy or sell shares like any other investor, relying and based on information from the public reports and accounts making his own investment judgement. They can sell their shares obtained by ESOP benefits. That is not insider trading. But there are certain stipulations of reporting of shares traded by directors and top executives. The main reports and accounts of the company also discloses such information.
Insider trading is illegal and punishable because that gives the perpetrators an exclusive advantage and the level playing field is denied to a normal investor. The same can bring losses to ordinary investors and amounts to cheating. It is also against the confidentiality and exclusive privacy terms of the company and against the rules laid out by stock exchange and regulators.
Insider trading can be identified easily from the large and unusual volumes of trade even before any public report is made and there are no rational and logical reasons for the trade to occur at that time.
Sometimes the employees themselves may not involve in insider trading, but will enable others who are close to them indulge in trading by revealing information in their personal talk and divulging confidential matters. Such things can happen from the family members of the insider, friends, other personal contacts etc.
The restrictions, regulations and details about insider trading can be had from"SECURITIES AND EXCHANGE BOARD OF INDIA(PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015"