Individuals investing in the stock market aim to generate profits and acquire wealth. But traders often use illegal practices to maximise their profits from the market. This article will shed light on one such malpractice known as insider trading.
Published on 16 January 2023
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Understanding Insider Trading
The ‘Insider trading meaning’ is quite evident from its name. It revolves around trades undertaken by insiders with knowledge about a company’s stock and patterns. The insiders often have knowledge about security before any information related to it is made available to the public. When an insider trading practice gets known to regulatory authorities, the insider has to face harsh consequences.
When Does Insider Trading Become Illegal?
Once you understand what is insider trading, you should know what makes it illegal. The Security and Exchange Board of India has put forward certain regulations related to insider trading. The practice is considered illegal because it gives an unfair advantage to specific traders in the share market.
Insider trading is usually practised by individuals who have access to the private details of a company because of their employment status. Knowledge about the private details of a company can have a huge impact on whether you will be earning profits or not.
For instance, insiders often know about the quarter results of a company that can make stock prices go high. They can leverage this knowledge and invest in a substantial amount of that particular stock to get extensive returns.
But when investors are trading stocks about which there is public information in the market, it’s not illegal. As long as investors don’t have non-public information about a particular stock, they can’t be involved in insider trading.
Insider Information
Information about a stock can be anything that can have a significant impact on the investor’s decisions to buy or sell a stock. Any information that has not been released to the public yet gives an unfair advantage to insiders. Insider trading is always illegal irrespective of how the person received the information.
An individual does not have to be working inside the company to be involved in insider trading. For instance, an employee shared non-public information about a stock with their friend. That friend traded on the stock using the information.
In this case, both the employee and their friend can face harsh penalties for insider trading. If you are accused of NSE insider trading, you can be charged with a penalty of Rs INR 250,000,000. You will have to bear a penalty three times higher than the profit made out of the deal when the profit is higher.
Examples of Insider Trading
Some real-life examples of insider trading are as follows:
● Reliance Industries
SEBI banned RIL from the derivatives sector for a year and deposited a fine on the company. RIL was charged for making profits by ignoring rules about its legally permissible trading limits and reducing the price of its stock in the market.
● Martha Stewart
When the FDA rejected the new cancer drug of ImClone, its shares took a sharp dive. But the impact of the fall was not evident in the family of CEO Samuel Waskal. Right after receiving the rejection notice, Martha Stewart sold her holdings in the company while the shares were still trading at $50.
As a result, the stock price came down to $10 within a few months. She was made to resign as the CEO of her company. Waskal was fined $4.3 million and sentenced to more than 7 years of imprisonment.
● Raj Rajaratnam
Raj Rajaratnam, a billionaire hedge fund manager, swapped tips with other hedge fund managers and traders. He also shared insider information with key employees at large corporations like Intel Corp, IBM, and McKinsey & Co. While he made $60 million from the insider trade, he was fined $92.8 million after being caught.
● Joseph Nacchio
He dumped his stock in the market and continued to give positive financial projections to shareholders despite knowing of severe problems at Qwest Communications. He made $50 million from the trade but was caught and convicted in 2007.
● Yoshiaki Murakami
He used non-public information about Livedoor to make a profit of $25.5. He bought two million shares after learning that Livedoor was planning to acquire a 5% stake in Nippon Broadcasting.
Wrapping up
When you can’t seem to make your trades profitable, turning to unfair means is never the right choice. If you are caught in insider trading, the penalty will be higher than your profits from the malpractice. Contact an experienced broker to learn more about gaining higher returns from your investments.
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Choosing the right stocks for trading and investment purposes can be a little difficult and tricky, especially when you are only starting your journey in the stock market. But is it all that difficult? Not if you know what parameters you need to select your stocks.
Employees play an important role in the growth and development of a company. They are a driving force that keeps the company going. The efforts and diligence of employees is the key component for the expansion and success of a business.
The core maxim of investment is to set realistic expectations regarding returns, so you can plan your goals and achieve them. A simpler way to understand the importance of assuming practical returns on investment is through an example.
Difference Between Large Cap and Medium Cap in Stock Market
Choosing the right stocks for trading and investment purposes can be a little difficult and tricky, especially when you are only starting your journey in the stock market. But is it all that difficult? Not if you know what parameters you need to select your stocks.
Employees play an important role in the growth and development of a company. They are a driving force that keeps the company going. The efforts and diligence of employees is the key component for the expansion and success of a business.
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