Insider trading refers to the illegal practice of buying or selling securities (such as stocks, bonds, or options) based on material, non-public information about the company. It occurs when a person who has privileged information about a company's financial situation, performance, or significant developments uses that information to make trades in order to gain an unfair advantage over other investors. Insider trading violates securities laws and regulations, as it undermines the principles of fair and equal access to information for all market participants. It can lead to criminal charges, hefty fines, imprisonment, and civil penalties for those involved.
Insider trading can occur in various ways, such as when corporate insiders (such as executives, directors, or employees) trade based on confidential information they have access to, or when individuals obtain inside information through relationships with insiders, such as friends, family members, or business associates. Insider trading can involve buying or selling securities and can occur in any financial market.
The use of insider information to make trades gives the individuals involved an unfair advantage over other investors, as they can potentially profit from the knowledge of upcoming positive or negative events that are not yet known to the general public. This can result in significant financial gain for those involved in the illegal activity.
To combat insider trading, many countries have enacted laws and regulations that require insiders to disclose their trades and prohibit the use of non-public information for personal gain. In addition, regulatory bodies and stock exchanges closely monitor trading activities and investigate suspicious transactions to detect and prosecute cases of insider trading.
Insider trading not only undermines the fairness and integrity of the financial markets but also erodes investor confidence. It is considered a serious violation of securities laws and harmful to the overall functioning and trust in the financial system.