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Reviewed by Sep 25, 2022| Updated on
Insider Trading refers to the trading made on nonpublic material information that significantly affects the share price of the company upon execution using that source. In many countries, insider trading is not legal and miscreants are charged severely. However, the nature of the material information, with regard to internal and external environments, has led to different laws and penalties in various countries.
Not all information of the company is available to the public, and in general, that is not an issue since all members of the environment need not know every specific aspect of the company. But when key information—which the Indian law, according to Sections 12A, 15G of the Securities and Exchange Board of India Act, 1992, terms as price-sensitive information—is deliberately withheld from the public to make personal gains, then it becomes a punishable offense. When an investor (like key employees, internal management, etc.) has access to such price sensitive information to trade on the stock market, advises the agent or the principal to subscribe, buy, sell and more using that information unavailable to the public, going as far to create a market manipulation, or divulge information very selectively to some people (usually close ones)—then the investor’s actions are considered to be criminal. This information could be withheld purposefully to facilitate one's own gains within the management, or the entire management may hold it from the investing public, or use that information to manipulate the market in a manner that the perpetrator attains gains, are all examples of insider trading.
By virtue of their responsibilities, no insider inherently is a criminal. Possessing material information about the company is not an offense, although using that information before it is made public to channel their own gains is punishable. The insiders can still continue to trade the stock, though the trades must be registered with the governing body. Insider trading can be traced when great highs or lows occur in the share price on a day in large volumes, when no information regarding the company has been put out.