If many of you invest money in the share market or do trading then this post is going to be very important for you. Where we want to introduce you to a very important piece of information about the share market, which we know by the name of insider trading. Which is very important for you to know.
Yes guys! If you too are doing the same search in Google and want to know – what is insider trading and how does it work? So you have come to the right place, where we will try to provide you complete information about insider trading.
Most of you step into the share market for the purpose of making money, but many of them also succeed. On the other hand, some traders come to earn money from the market but due to lack of correct information, he loses all his freezing capital. Because his biggest drawback is that – he does not learn about the share market and starts investing directly.
What is Insider Trading?
When the management of a company buys and sells shares based on the information inside a company. And wrongly earns profit from the stock market, then it is called insider trading. SEBI takes action against such people.
Insider Trading is the trading of stocks or other stocks (such as bonds or stock options) of a public company. Based on information about the company, non-republican information. In different countries, these types of trade based on insider information are illegal.
This is because it is seen as an injustice to other investors who do not have access to the information. As investors with insider information can potentially make more profit than a large investor.
The rules governing Insider Trading are complex and vary greatly from country to country. The extent of enforcement also varies from one country to another. The definition of an insider in a jurisdiction can be broad, and can cover not only insiders, but anyone related to them. Such as brokers, associates, and even family members.
A person who becomes acquainted with non-public information and trades on that basis may be guilty of a crime.
Is insider trading part of the trade?
Trading in the share market is on the basis of segment. Trading is done in segments like – equity-cash, equity-derivative (F&O), commodity (MCX & NCDEX), currency etc.
But apart from these, there is also a trading, which we know by the name of Insider Trading.
Insider trading is called profit making by buying or selling shares illegally. This is often done by someone connected with the management of a company based on the inside information of the company. And that is why it falls under the category of insider trading.
- This means buying or selling stocks of a publicly traded company using insider information that has not yet been made public.
- Insider information refers to any information that may result in an investor’s decision being substantially influenced in terms of which stocks to buy or sell.
Manipulated spike and fall in share prices
In Insider Trading, the management of companies has information inside the company. What are the companies going to do in the coming days, which will increase the share price of that company. Also, the management also knows that the company’s share prices are going to decline. On the basis of this information, if such a person made a profit by buying and selling shares before the information became public, then it is insider trading.
Why is Insider Trading illegal?
If we talk about – why Insider trading is illegal? That is, it is not legal, because it comes under the purview of a crime. Because in insider trading, the trader who trades in the stock of the company is directly or indirectly attached to the company.
So from this he gets to know about the company report i.e. the performance of the company by the company manager in advance. With which he earns trader profit but avoids loss.
On the other hand, those who do not know about insider trading, in normal trade people do not know that – how is the performance of their company? And perhaps this is why common traders and investors suffer loss.
Considering that, the trade carried out with inside information. The company sees the possibility of loss, then insider people start selling their shares in profit and escaping loss. While the common trader is not aware of this, they have to face loss.
What are the negative impacts of Insider Trading?
If we talk about the negative impact of insider trading in the market. Then there have been many such consequences in history which we know as different types of Scam.
Like – Harshad Mehta Scam 1992! Harshad Mehta is an example of scam conducted through insider trading. Today, all the big investors and traders known as Big Bulls have become rich from Insider trading.
But Insider trading was not considered illegal at the time, which led to the appearance of the Harshad Mehta scam. Only then did SEBI i.e. Security Exchange Board of India was formed and since then Insider Trading is considered illegal.
The formation of SEBI was very important because special people associated with the company were benefited from insider trading. But the general public had to suffer a huge loss from it. Now you must have understood that – why was it necessary to constitute SEBI?
Steps by stocks and Exchange Board of India (SEBI)
SEBI (stocks and Exchange Board of India) has implemented a market surveillance system to identify insider trading. This system monitors unusual market patterns in the market. SEBI has also made continuous improvements in this system. Several companies have also been penalized by SEBI. SEBI has also enacted several laws.
- Management, promoters and employees are not allowed to trade in the shares of their company during the 48 hours before and after the declaration of the result.
- This rule also applies to auditors, accountancy firms, law firms, analysts and consultants who advise the company.
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SEBI implemented the rule of keeping the trading window closed for 48 hours. After the declaration of the result from the end of every quarter from 1 April.
Recently the stocks and Exchange Board of India – SEBI has laid down the criteria for control over the exchange of internal information.
Companies should keep details of such relatives of the nominees with whom it can share sensitive information or financial transaction information of the company.
All such information can be stored in electronic format by the company, and they can also be shared with SEBI to get information related to any matter.
The committee has recommended direct authorization to SEBI to tap telephones and other electronic communication devices so that it can investigate insider trading and other frauds.
Currently, SEBI has the right to ask for call records including mobile or telephone numbers and call duration only.
Conclusion
So our final opinion will be that we should not promote Insider trading in any way. We should do the trade like a legal common public, by playing the role of a good trader. And this is the identity of a good Trader. Perhaps this is why SEBI was formed so that a scam like Harshad Mehta could never be repeated again.
We hope our article on insider trading has provided you the complete information. And we hope you all will promote good trading and not insider trading.
