The precise definition tells us that the concept of insider trading is about trading of a company stock by anyone who is non-public and has access to material information. One must note that the information is treated as material if it can impact the stock price of the company in a significant manner. It is here that we have given the basic aspect of insider trading meaning but it is a broad topic and let us now discuss on it more.
Who precisely is an insider?
It is prior to discussing the insider trading regulations; one must first understand who precisely is an insider. The promoter of a firm is surely the first person to earn the insider tag. It is alongside the promoter family, the key employees and executives are also treated as insiders by the stock exchanges. Anyone in the company having insider information that could lead to significant change in stock prices is termed an insider.
The insider trades can be legal too:
One must note that not every insider trade is termed illegal. If the material information is in the public domain then the insider can always undertake a trade. This time the stock exchange authorities see no difference between an insider and the normal investors at the exchanges.
A look at the different mode of insider trades;
One must realize that there are various types of insider trading unfolding these days. The first format is about the insider person taking up a position on the company stock price based upon some secret information. These trades are easier to catch and can easily come on the radar of government authorities. The other format of insider trade is slightly trickier and it is about the insider passing on information in lieu of money. This is a form of insider trading, which the agencies have found a bit tough to crack, but they come on the radar in case the profit margin figure of the trader is significant.
How to avoid it?
The authorities are desperate to curtail insider trading because a section of the trading community should not be allowed to benefit due to access of secret information. The authorities are hard on any insider trading news and various countries have strongest laws in place to deal with this menace. In fact some countries have gone to the extent of introducing jail terms to tackle this problem.
The company is also expected to contribute here:
The company whose stock is being traded on the exchange is also expected to help in the fight against insider trading. Firstly, they are supposed to quickly bring in price sensitive information quickly in the public domain. Secondly, we would like to bring into focus that the company managements have been asked to publish on the website, any change in the shareholding pattern of directors and other insiders. These are two significant steps, which companies have been asked to undertake in the fight against insider trading.
This is a brief concept of insider trading and you also get to know how the authorities worldwide are striving hard to curb this menace.