Copyright (c) 2010 John Howell

We all remember when Martha Stewart went to jail.

Everyone's favorite homemaker, Stewart was charged with nine counts of securities fraud after receiving material, nonpublic information from her stock broker in 2001. Stewart was sentenced to serve five months in a United States Federal penitentiary.

While her career has continued and her time in the Big House has largely been forgotten by the general public, her case became a great example of insider trading stock gone horribly awry.

Insider trading stock is not always illegal, but since Stewart's case, it's become synonymous with the ultimate stock trading no-no in the US. For one thing, insider trading stock is almost universally misunderstood.

While pop culture has taught us to see it as something that will send you to jail in the United States -- and can be illegal in foreign stock markets -- it's merely the trading of stock and other commodities by someone with inside or "nonpublic" knowledge of a certain company.

Insider trading stock is usually exchanged by company employees, former employees, or company board members but the Securities and Exchange Commission is typically only truly concerned about transactions involving shareholders with access to more than 10 percent of a company's stock. In order for it to be legal in the US, insider trading stock must take place at key times, such as when a company releases their annual earnings report.

Insider trading by major stockholders can also be considered legal when they're reported to the SEC through filed reports.

Insider trading stock becomes illegal under certain conditions, many of which were explored and revisited by SEC in the wake of Stewart's trial and conviction. In the US and Germany, an "insider" is defined as a company officer, director, or beneficial owner with access to more than 10 percent of the company's equity securities.

Insider trading stock trades based on nonpublic knowledge, made by these individuals are considered fraudulent. The SEC considers it such a heinous crime because the officers of that company are in violation of fiduciary duty to their shareholders. Much like a parent to a child, these employees and board members are expected to put the good of their subordinates before their own and insider trading stock in this incidence violates that employee's obligation to his or her shareholders.

Even if an insider merely "tips off" a friend, in a case like Stewart's, the liability cannot be passed off. If that friend then goes and makes the insider trading stock based on the nonpublic knowledge their friend passed along (and is aware that they were making their trading decisions based on insider knowledge), the insider is still considered liable for any illegal activity that might go on.