Insider Trading

Insider Trading

🔥NEW Insider trading is an unethical (and often illegal) form of trading where securities transactions are undertaken by people who by virtue of their work have access to certain material information which is otherwise not available to common investors of a listed public company. This material information is termed "insider information". This availability of this information enables the insider trading in that company's stocks and securities.

Parties:
The set of insiders typically includes: company's CEOs, key executives, directors, lawyers, accountants, government regulator's bureaucrats, printing company's employees, and so on. Tipsters (informers) leak the confidential information outside the walls of company. They have direct or indirect access to the material information before it is released in the public domain. These people and the ones that are prematurely informed by them have an upper edge over other investors who do not have access to the information. Using the information, they are able to generate unfair profits beyond those achievable by regular, common investors.

Illegal versus legal trades:
Legality of the trading activity is dependent on time factor when the trade is executed i.e., before or after releasing the information in public domain. The trading activity is legal when it is undertaken after releasing the information. It is illegal when it is performed before releasing the information in public domain. Insider trading is legal when buy or sell transactions are executed and reported in accordance with securities laws and regulations prevalent in the country.

Examples of insider trading:
1. Key personnel of the company sell out their holdings after discovering that the company will be losing a major government contract in days to come.
2. Insider personnel purchase stocks or write future options / contracts knowing beforehand that company has finalized a major contract for expansion / merger or acquisition.

Difficulties:
Large companies can have a big number of insiders. It's a challenging task for regulators to analyze all their buy and sell transactions. It's an intellectual and difficult task to trace all teepees and tippers involved in the transaction trail.

Tools:
Stock market regulators use sophisticated tools to detect illegal insider trading, especially around the time of important corporate action events. During such events, huge trades are marked as suspicious for further investigation. Complaints from investors, tippers, and whistle blowers are also monitored to unearth the unethical trades. Reports in the media may also provide useful leads for investigation.

Conclusion:
Buying or selling stock based on insider information can be a criminal offense. Insider trading can be legal as long as it conforms to the rules set forth by the securities regulators of the country. It is not always true that only directors and top management personnel can be convicted of insider trading.