Saturday, October 8, 2011

Insider Trading

Legal or Illegal?

It's both. There are two forms of Insider Trading. One legal and the other not. In general Insider Trading is the dealings (buying and selling) of stocks/shares of a company by people relating to the company, for an example, directors, officers, employees and large share holders. However if this is done in full disclosure it is considered legal. On the other hand it is illegal to engage in trading of a share for the above mentioned parties based on material and undisclosed/non-public information. This is considered unfair or unethical to those traders who  doesn't have possession of such information.


Who is an 'Insider'?

An Insider is identified as a person/party who has access to important information about the company that could affect the share prices of the company directly or indirectly or that might affect investor decisions at large. These kind of information is known as 'Material Information'.

So in general, the CEO, the Managing Director/s, the members of the Board of Directors, employees, other officers, brokers and even family members of related people can be found guilty of Insider Trading. Any 'tipping off' of any information by and to such parties could be found guilty. 


If found guilty;

If found guilty of Insider trading, the Insider will have to return all the profits he/she made from the Insider trade or this may extend up to three times the profit earned form the trade. Beyond this Laws are being strengthened to increase the penalties for Insider Trading. As of now stock defrauding can extend to a penalty up to 10 years of imprisonment. 


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