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What is Insider Trading?

Date: Sep 22, 2022 | Time: 06:26:00 PM | Author: Editor News

Trading is exciting and challenging until it is safe and secure. Since trading is done to make money, you have to take into consideration many things. Because there are numerous ways through which you could lose your hard-earned money and Insider Trading is one such way. Due to the lack of significant insider non-public information about the company, other investors can have several disadvantages. Trade would turn out to be unfair, whilst anybody with the inside knowledge of the company could make a lot of money, at times, more than the real investor!

To know more about this crucial risk associated with Insider trading, you may go through the article.

Definition: Insider Trading

The process of buying or selling stocks or other securities of a publicly traded company, based on material and non-public information about that stock for any reason is referred to as Insider Trading. Rather than just buying and selling stock, it is considered malpractice, as trading based on insider information is illegal. Insider trading violations comprise tipping such non-public information, securities trading by the individual tipped and finally securities trading by those who misappropriate such crucial details.

The insiders will be ensuring that the securities are bought or sold right before they are fluctuating in price. They will be benefitted by doing so, as they have got access to confidential information regarding the issuer of a particular stock or security.

Who could be considered the insider of the company?

The insiders could be the directors, promoters, executives or employees of that particular company. They will be having access to sensitive information regarding the shares and securities of the company that they are working for. During the months prior to the insider trade, they could be associated with the firm under any circumstances. Moreover, there is some possibility of that person being the official of an asset management company (AMC) or even an official of stock exchanges.

Moreover, information that is not legally available to the public is referred to as non-public information. Making investment decisions about the securities of the company would turn out to be vital. Whereas, material information is the one that would affect the decision of the investor to whether sell or buy the security.

To promote fair trading for the benefit of the common investor in stock marketing, Insider trading is never encouraged by the Securities and Exchange Board of India (SEBI). If found violating the rules set by SEBI, the market regulator of the country could prohibit individuals or entities from trading in the market or impose fines on the culprits. As per the Insider Trading Regulations of 2015, insider trading is regulated by SEBI.

Types of Insider Trading

According to how the insider does the trade, such kind of trading can be categorised into legal or illegal insider trading.

Legal Insider Trading: Such trading is done with the knowledge of authorities. Just like normal insider trading, the insiders of the company would trade with the securities of the company such as stock, bonds, equity etc., with the only difference that they will be reported to the authorities such as SEBI. Moreover, this type of insider trading is not centred on non-public information.

Illegal Insider Trading: This is completely based on private information that is not available to the public. A majority of insider trading can be labelled as illegal insider trading as they are more of a manipulation. Here, the wealth is transferred from outsiders (uninformed investors) to insiders (informed investors). These traders shall be liable to the strict penalty set by the SEBI.

What you need to know about UPSI?

The sensitive information of a firm that is not known and shared with the public is referred to as UPSI (unpublished price-sensitive information). It could be about any sensitive activities, acquisition deals, stock prices, mergers or quarterly results. With the motive of personal gains, the insiders of the company illegally conduct trade, as they can access UPSI

Some Examples of Insider Trading

·       A government employee secretly investing in real estate companies, when he came to know that new laws and regulations will be passed. According to these changes, the real estate companies will be benefitted soon.

·       A lawyer selling some stocks of a company, whose CEO is soon to be accused of accounting fraud. This lawyer would know about it through a confidential meeting. Further, in such a circumstance of the indictment, he would have analysed that the stock price is going to be low by then.

Major Reasons why Insider trading is illegal

Real Investors will lose their trust: There is no doubt in the statement that the confidence of the people will be drastically affected when they are trading and get used to Insider trading. Moreover, if the traders feel that trade is not fair enough, they could seldom back off from the trading process which would impact the market conditions negatively.

For other investors, trading would seem unfair: Rather than the profit gained by the typical investor, the other investor who has got access to the non-public information of the company could obviously gain more. This type of insider trading will look unfair and unjustifiable to the investors who do not have access to the sensitive information of the company.

Unethical terms used for trading: In simpler words, this practice is not morally right and the procedures are completely unethical. With that very piece of information, every investor should avail of equal opportunities whilst trading.

When is your Insider trading illegal?

·       With regard to the unpublished price-sensitive information of the company, if you are procuring any other entity to deal with any securities, then it could be considered illegal trading.

·       When dealing with the securities of a company listed on the stock exchange, if you are on the behalf of the other person and that too as per the unpublished price-sensitive information, then you are engaged in illegal insider trading.

·       Besides required in the ordinary course of business, when you are communicating any unpublished information to the third person, with or without their consent, then that too will turn out to be illegal trading.


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