Insider Trading Types
Insider Trading is also known as insider dealing is a kind of malpractice of selling or buying the securities such as equity and bonds on the basis of information that’s not known to public. Insider Trading involves the direct breach of fiduciary duty or any kind of violation of trust.
Insider trading comes into act when someone makes a trade based on “material “information that’s not available to the public. In other words, material information which directly affect the company’s stock price.
There are instances when there is no impact of insider trading on the market and investors and traders’ sentiments. Some rules and regulations regarding insider trading are complicated and general, vary from country to country. Some follow narrow definition and only consider people within the company with the direct access to the information as an insider. On the other hand, some people consider company officials as “insiders”.
Types of Insider Trading in India
Here we have mentioned different types of Insider trading.
1. Legal Insider Trading- As the name suggest insider trading related to the act of illegal actions against the company shares. However, there is such things which acts as legal in the insider trading as well. Legal insider Trading can be defined as trading carried out by the connected persons only or we can say by the insider person only.
There are some things that makes it legal is insider does not hold any specific advantage over the other traders. Insiders trade according to their own strategy in company’s shares on the basis of general information that is available to the public.
Stock market is full of legal activities. There are some companies that remunerate their employees by offering them company’s shares as well.
For example- A company is going to launch a new product in the market that is bound to hit among customers that significantly increase its revenue.
The company’s CEO then buys 1,000 shares of his own company priced at Rs.500 based on this information.
The CEO invested = 1,000*500=Rs.5,000,00
The product turned out to be profitable for the company and the company’s price touches the high of Rs.700.
The significant growth of Rs.200 per share that was bought for Rs.500 resulting in overall increment of the investment to 1,000 shares*Rs700=Rs.7,000,00.
Thus, the CEO earned a good profit of Rs.2,000,00 through the transaction.
2. Illegal Insider Trading- In the illegal insider trading a trader has access to inside information which is not public and give a benefit to the person over the rest of traders.
It is based on the non-public information such as news about an acquisition, merger, or a new product launch which can have a major impact on the share price of a business.
In this type of trading there is less opportunities for a regular investor who does not have access to such data.
The market regulator, SEBI has devised PIT Regulations (Prohibition of Insider Trading) to keep the insider trading cases in check.
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