Updated Feb 20, 2022

What is insider Trading?

What is Insider Trading?

Introduction

Insider trading is the malpractice of buying or selling a company’s securities while withholding information from the public. This information can have a massive impact on the company and investors’ decisions pertaining to buying and selling securities. Only a few people have hold of this kind of private information.

In other words, insider trading refers to buying and selling shares through people directly within the company based on unpublished information generally from higher authorities who have the wherewithal to get it and share it with the few people they think might benefit from it. Insider trading is illegal and can result in colossal penalties for the company as well as the people who partake in this process.

What Does Insider Trading Entail?

Insider trading involves privately buying or selling shares of a listed company on the stock market through ‘insider information. This is also known as unpublished price-sensitive information (UPSI). This can affect the monetary price of the share, and stock price, which has not yet been announced to the public. This means that this is a private exchange between people who want to benefit from the company’s shares they hold or bring their company’s share price higher.

According to the Securities and Exchange Board of India, an insider can be defined as a person who has access to UPSI or someone who is connected to a person with that information. It could be a director, an employee, or even a relative of anyone within the company who has withheld the information and trades according to those guidelines. UPSI includes information like quarterly results, merger deals, expansion plans, and any other major milestone the company plans to announce at a later date.

Is Insider Trading Always Illegal?

Most times, insider trading is illegal. Nonetheless, there are always exceptions to any rule. For example, many individuals on the Board of Directors of companies can trade shares and stocks as insiders for personal use, which they are mandated to inform the SEBI of. In this case, insider trading is not considered illegal. However, this must be done within a few days of the trade, and the trading details of the promoter must be disclosed if its value is above INR 10,00,000.

How Does Insider Trading Work?

Insider trading works on the basis of people sharing undisclosed public information with others to gain a profit from the stock market or to avoid a huge loss they may face if they did not know this beforehand. It is an abuse of knowledge and power which means that the regular trader who may have been investing in the company’s stocks and shares earlier may not stand a chance of having the same advantage.

Insider trading can also be brought to light when no fiduciary duty is present. In this case, the deed is brought to life because of another crime committed by the company. For example, incorporate espionage, an organization might make use of legal institutions to acquire private information. If they are caught, then the party involved might be accused of insider trading along with other felonies.

Why is it Important to Know About Insider Trading?

Generally, stock trading allows investors to study the market and determine which stocks and shares are right for them. Insider trading gives companies or individuals an advantage over others which is not fair because it means that these people with UPSI tend to gain more out of the market. This means that people without this information can lose substantial money in the deal. Many people who have been at the losing end of insider trading lose faith in the stock market, and as a result, foreign investors may also be wary of the company’s reputation.

Conclusion

No company should partake in insider trading because it can mean dire consequences for them. In fact, it can mean substantial fines and jail time, or even both. Insider trading might mar the reputation of a company and can result in fewer investors if, by chance, they land up in the middle of one of these scandals. Many times, insider trading is done secretly, and the public does not know about it, which means that a lot of times, regular investors do not have adequate knowledge and stand to lose far more in the trade.