Insider Trading Definition
Insider trading refers to the practice of trading a public company’s stock or other securities (such as bonds or stock options) based on material, non-public information about the company. In many countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider’s duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.
Insider Trading Key Points
- Insider trading involves trading in a public company’s stock or other securities based on non-public, material information about the company.
- It is considered illegal when the information used is not available to the public and gives the insider an unfair advantage in the market.
- The term is often associated with illegal conduct, but it can also be legal if the trading occurs on the basis of information which is available to the public.
- Insider trading can be harmful to the market, as it can undermine investor confidence in the fairness and integrity of the securities markets.
Who is involved in Insider Trading?
Insider trading can be conducted by anyone who has access to non-public, material information about a company. This can include company’s officers, directors, employees, and large shareholders. In some cases, even a person who receives the information from an insider (a “tippee”) can be guilty of insider trading if they knew the information was confidential and traded on it.
What is the purpose of Insider Trading?
The purpose of insider trading is to gain an unfair advantage in the market, by trading based on non-public information. This can result in significant financial gain for the insider, but it is considered illegal and unethical.
When does Insider Trading occur?
Insider trading can occur at any time the insider has access to non-public, material information about a company. This could be in the lead up to a major announcement, or following a private event or discussion.
Where does Insider Trading occur?
Insider trading can occur anywhere, but it is most commonly associated with the stock market. It can also occur in other securities markets, such as bonds or stock options.
Why is Insider Trading significant?
Insider trading is significant because it can undermine investor confidence in the fairness and integrity of the securities markets. If investors feel that they are at a disadvantage to insiders, they are less likely to invest, which can have a negative impact on the economy.
How is Insider Trading detected and prevented?
Insider trading is detected through market surveillance activities and tips from whistleblowers. It is prevented through regulatory measures, corporate policies, and legal enforcement. Penalties for insider trading can be severe, including fines and imprisonment.
