Monday, February 6

What is Insider Trading?

insider trading
insider trading

It involves trading in public company’s stock by a trader who has materialistic and non-public information. However, it depends on certain conditions whether insider trading is legal or illegal. That’s what excites traders to learn more about it. Here we have a short guide on insider trading, so let’s dig in and have a look at what is insider trading.

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Defining Insider Trading

 

Insider trading or insider dealings whatever you call it, is a malpractice that some traders carry out. Traders buy and sell securities of a company with some inside information.

The details are personal and not for public use. That’s the reason it is considered an illegal way of trading.

An insider can be anyone, employee, director, executives or promoters of the company.

Also, insider trading can be illegal and legal. It depends on when an insider executes the trade. It is illegal when the information is non-public and it comes with severe consequences for the trader.

What is materialistic and non-public information?

Materialistic and non-public information is the data that could substantially impact the investors decisions of buying or selling the securities. Besides, the information has not been made public as for the time.

An insider uses such delicate information to take unfair advantages. They trade in the stocks with the information and earn good profits. It is biassed with other traders and with the company as well.

Therefore, insider trading is an illegal practice which impacts the company. They  cannot use the information or data which is not for general use.

Examples of Insider Trading

There are many real life and hypothetical examples of insider trading. Users can learn from them how such activities take place in the financial markets. We’ll be discussing two examples, one real life and another hypothetical to get a clear concept of insider trading’s.

Real-Life Example

A 2003 incident is a good real life example of insider trading. The shares of ImClone sharply decreased when it was found that the FDA rejected its new cancer drug. After such a shift in stock price of the company, the family of CEO, Samuel Waskal was unaffected.

Also, Martha Stewart after receiving advance notice of rejection started selling her holdings in the stock’s of the company. It was at the time when shares were trading at the value of $50.

The stock subsequently fell to $10 in a few months. She was forced to resign from her position of CEO and Waskal was sentenced to jail for more than seven years with a fine of $4.3 million.

Hypothetical Example

Let’s suppose a government employee has some information and acts upon his knowledge. He has details of a new regulation which will be passed benefiting wheat exporting firms.

He buys the shares of the company before the regulation is passed and it becomes public.

So, he is taking advantage of the knowledge illegally and acts as an insider profiting from the details.

Penalties of Insider

An insider executes an illegal act and is open to penalties assigned by the government and the authorities. When someone is caught in the act of insider tradings, the person is sent to jail or charged a fine or even both.

According to the Securities and Exchange Commission (SEC) US, a conviction for insider tradings leads to a maximum fine of $5 million. Also, they have up to 20 years of imprisonment.

As per Securities and Exchange Board of India (SEBI), insider tradings convict has a penalty of Rs. 250,000,000 or three times of the profit of the deal. Trader is charged one which is higher of the two.

Insider traders are charged with such penalties for their fraudulent acts. Therefore, a trader should practise even trading in the financial trades.

Conclusion

Insider trading is an illegal practice. Traders should not misuse any information which is not public for traders. The article discusses what is insider trading, what are the materialistic and non public information.

Besides it focuses on examples and what penalties insider trading practitioners can incur.

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