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What is Insider Trading?

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On many occasions, the Securities and Exchange Board of India (SEBI) has charged companies and associated individuals for insider trading. But what is insider trading and what are the consequences of being involved in it? And most importantly, what makes insider trading an unfair trade practice?

In this blog, we will explore all the aspects of insider trading, in and out, and by the end of it, you shall know all that you need to know about the concept. So let’s dive right in.

Highlights of the Blog

  • What is Insider Trading?
  • Types of Insider Trading
  • Implications of Insider Trading
  • SEBI Regulations

What is Insider Trading?

Insider trading is an illegal way of dealing in shares by people with non-public knowledge of the strategic information about the company. These insiders could be individuals associated with the company by way of employment or otherwise, possessing price-sensitive information.

SEBI strongly discourages insider trading to boost fair trade in the market to benefit common investors. However, it is important to note that when the information is made public and all the investors have equal access, in such cases it will not be considered as illegal.

Types of Insider Trading

Now that you know what is insider trading, let’s understand its types. Mainly, there are 4 types of insider trading.

  • Front-Running

This is when a stockbroker places trades from a personal account before placing huge orders for clients, making a profit from the expected price movement.

  • Misappropriation

This is when outsiders gain access to the company’s confidential information and misappropriately use it to create their trade position.

  • Trading During Restricted Periods

This type of insider trading involves trading securities during the period when insiders from a particular company are banned from doing so.

  • Tipper-Tippee Trading

In this case, the informant (tipper) shares confidential information about the company to the recipient (tippee) who then carries out trading activities based on it.

  • Traditional Insider Trading

The classic way of insider trading is when insiders like employees and executives are involved in buying or selling a company's shares based on non-public information.

Implications of Insider Trading

Along with creating an unfair environment for innocent investors, instances of insider trading can have other implications for the stock market. Some of them are mentioned below:

  • It causes irrational demand and supply and erratic price movements, thereby deviating stocks from their true value.
  • With frequent insider trading cases, investors may lose trust in the stock market.
  • It creates an uneven playing field as insiders with price-sensitive information may have an advantage over investors who don’t.

Thus, the SEBI discourages instances of insider trading to protect the interests of investors by keeping regulations in place. Let’s explore them.

SEBI Regulations

If any insider is involved in trading of company’s shares based on unpublished price-sensitive information, then she/he shall be liable to penalty as per the provisions of SEBI’s Prohibition of Insider Trading Regulations, 2015.

Furthermore, upon violation of the rules, the regulator may also ban individuals or entities from engaging in trading activities in the capital market.

In Conclusion

Insider trading involves benefiting from unfair trading activities by misusing price-sensitive information. While insiders can use various methods to take undue advantage, some of the common ways are executive tip-off, personal contacts, breaching restrictions, etc. It is always wise to invest wisely to stay informed about the negative implications of insider trading on a particular stock as well as on the market sentiments.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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