Meaning of Insider Trading
Insider Trading refers to buying and selling off securities of public company using non-public material information by insider. Insider are the individuals who have every minute information regarding the organization in which they work holding distinct positions such as Directors, managers, CEO, employees or owners. When these peoples buy or sell company’s stock on the basis of some strategic information that is not revealed to all potential investors, then this activity is termed as insider trading. Even the close associates of insider such as friends, family members and other relatives trading on basis of non-public information is termed as insider trading.
This type of trading is illegal in nature and highly discouraged by Securities Exchange board of India for ensuring fair trade practices in Indian market. Insider trading is legal as long as it is done in confirmation to the rules of Securities and Exchange Commission. The practice of insider trading comes with heavy consequences under which fraudulent persons may be charge with fine or imprisonment or even both of these in some cases.
Forms of Insider Trading
Various types of insider trading are as discussed below: –
Members of company buying a security
Employees or other members of organization are in such as position to acquire strategic information about company that is not available to general public. These individuals quickly buy and sell securities of public company on the basis of these confidential information which is considered totally illegal.
Family, friend and acquaintances of corporate employees
Employees working within the corporate institutes shares some crucial information in their close circle that is not disclosed to general public. Sometimes, details are disclosed innocently whereas many times it is revealed with the intention of benefitting their close friends. Employees may give tip to their friends and acquaintances for trading through them as these peoples are less likely to be scrutinized by Securities and Exchange commission in comparison to working employees.
Different officials holding positions in government agencies may gain access to confidential information related to company that may be useful for trading purpose. When buying and selling of stock is done on the basis of non-public information, it comes in category of insider information.
Corporate spies, hackers and thieves
Many times various criminal individuals may gain access to corporate information secretly by illegal means that they can use for doing fraudulent trading activities.