In Stock Markets, What Is Insider Trading? | Motilal Oswal

What Is Insider Trading

When individuals invest in stocks and other securities, the goal is to attain wealth. The faster this goal is achieved, the better, for some investors. In the world of trading, especially while trading in stocks and shares, traders find ways of trading that maximise their profit. Of course, the share markets and exchanges have their fair ‘share’ of malpractice while trading is being executed, and some traders go to great lengths to make a profit. Insider trading, as the name suggests, involves trading that is undertaken by insiders, those who know about a certain company’s stock and its patterns. 

1. What is Insider Trading

In stock market trading parlance, ‘insider trading' is trading in stocks, like bonds and equities, by specific company ‘insiders’ who have access to information exclusively. Put simply, these insiders know about a distinctive security before any information related to it becomes known to the public at large. When insiders invest in stocks while there is no knowledge about a particular stock publicly, insider trading is considered an illegal practice. If such trading becomes known to regulatory authorities, harsh consequences are borne by the ‘insider’. 

2. When is Insider Trading Illegal?

The Securities and Exchange Board of India, or SEBI, is highly against insider trading as put forth by SEBI regulations. The logic behind the practice being termed as ‘illegal’ is the fact that insider trading gives some investors an unfair advantage in the share market. Insider trading is typically undertaken by individuals who, by virtue of their employment, have unique access to certain kinds of strategic information about stocks of a certain company. Knowing the private details of a company can significantly have a bearing on whether you invest and earn a profit or not. For example, insiders may know if a company’s quarter results are going to show a huge profit, thereby taking stock prices high. They can take advantage of this and invest a substantial amount in the said stock, almost guaranteeing major returns. Viewed from this angle, insider trading is considered illegal. However, when investors invest in stocks, and all concerned investors are knowledgeable about certain information that has an impact on their profit or loss in trading, insider trading is not illegal. 

3. Information for Insiders

In the arena of trading, material information about a stock or a company is any information that may significantly have an impact on a trader’s/investor’s decision to trade (buy or sell) a specific security. Non-public information is that which is not known to the public officially. Therefore, material information that is not made aware to the general public is what insiders use to have an unfair edge while trading. Insider trading is illegal no matter how the information was sourced, whether the ‘insider’ is employed with the given company or not. In an example of this, say, a person learns about insider information (non-public information) from a friend. Then, this information is shared with a member of their family. The family member trades with this information on the said stock. In such a case, all three involved could face prosecution or harsh penalties.

4. Fair Trading 

While you shouldn’t have to depend on unfair means to trade, you may be wondering how to make your trading profitable. If you open a demat account with an experienced broker like Motilal Oswal, you can get tips and learn from the best. This is the fair and right way to see returns on your investment in the stock market. 

Related Articles:

SEBI Introduces a New Disclosure Format in Accordance with Insider Trading Rules
 

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