Insider Trading Meaning

What is Insider Trading in Stock Market?: Meaning of Insider Trading is when an individual or an entity of groups who have some non-public information of a certain company or an organization which is not yet made publicly available. If that information is made available to the public without making it public information by the C.E.O or the chairperson of that company and if that person reacts on that information like buying or selling of shares then it is insider trading which is illegal when the information is still non-public in most of the countries.

What are the laws for Insider Trading?

Securities and Exchange Board of India (SEBI) promotes fair trading in the stock market for the benefit of the common investor and does not allow practicing insider trading in India and most of the countries have been strict rules for breaching trading while practicing insider trading. There is a huge amount of fine charged and also imprisonment for years.

In Insider trading, it’s illegal to buy or sell shares of that particular company if the information is non-public and if the C.E.O and all the others members that know about the non-public information should not take any action on it like buying or selling of shares or cannot give this information to any other person while if he takes action on it then it is an illegal practice.

Insider Trading vs. Insider Information

  • Insider Information

Insider information means the knowledge of the non-public material with context to a publicly-traded company which will provide an unfair justice to the trader or an investor if that information is overheard.

Example: – Let’s assume that a secret meeting is going on between the CEO and CFO and an individual while passing overhears some non-public matters is said to be Insider Information.

In the next scene if that CEO knows the confidential information and he knows that one of his friends has been invested in that company and give him a hint to sell the shares as the quarter’s results are meeting loss. So this activity states as insider information.

  • Insider Trading

If an individual has insider information and does trades according to that information provided to him then it is said to be an insider trading. In the above example mentioned about CEO and his friends if his friend’s trade according to the hint given by the CEO before releasing the earnings to the public then it is illegal to do the trading and it will be unfair for the rest of the trader’s or investors.

Legal Insider Trading

Legal Insider trading occurs in the stock market every week. The details for the transaction should be requiring getting it submitted electronically on time and it should be disclosed on the company’s website. They can easily and legally be permitted to trade on the insiders but before that, they should inform about this information to the Securities and Exchange Commission (SEC) and should need to do with advance fillings.

After the Securities Exchange Act of 1934 was the first time it is mandatory to disclose the transactions of company stock and the directors and major owners of the stock need to disclose their positions in a company with different forms.

•   Form 3 is used for filling details about the stake in the company

•   Form 4 is used for disclosing the transaction of stock within 2days of purchase or sale.

•   Form 5 is used for declaring the earlier transaction or those that have been postponed.

Illegal Insider Trading

Most of the form of insider trading is illegal to use the non-public information for making a profit. This illegal trading can be done by anyone from the company or from anyone who knows the insider of that particular company.  If the company uses the non-public information and makes trade according to it without getting fillings from SEC then it is termed as illegal Insider trading.

The SEC will be able to monitor and can track whether any illegal insider trading has been done or not just by looking and analysis at the trading volumes of a particular stock. Volumes generally increase when the company releases some material information to the public but when the volume increases and there is no information circulated to the public then there is need to observe and analyse the reason behind it. The SEC then starts to investigate the reason for the increment of volume, to determine who is responsible for this trading and whether it is illegal or not.

Conclusion

Insider trading is not a correct procedure to make profits from and also the government takes strict actions on it if the government caught an individual indulge in the trading that is not valid in the country but in some countries, this trading is not prohibited and the citizen over there can take action on it.

We hope that you like our blog on What is Insider Trading in Stock market? and through this blog we hope that you understand the insider trading meaning. If any Query, contact us via mail.

Regarding Us

Trading Fuel is blog sites that provide a variety of information on the stock market and keeps on updating the site with more new learning. This blog is about the insider trading which is prohibited in the globe this practicing makes an injustice to the common investors as are unaware of some information that is made publicly available that’s why in the favor of this kind of investor the government doesn’t allow anyone to work on this. After reading the complete blog, if you have some doubts or query regarding the topic you can easily contact us via email us and for learning more information about the market read from Trading Fuel.

Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.