Insider information – is closed to the public information, the disclosure of which can greatly affect the value of the securities of a company.
According to this, insiders in trading are people who possess knowledge of non-public information. Moreover, this knowledge is based on facts that are just being prepared for publication.
By American standards, an insider is considered a person who owns 10 percent or more of shares and because of this has the right to participate in making important decisions concerning the company. Moreover, without his presence, important decisions cannot be made .
The use of insider information for the purpose of fraud and personal gain is considered a crime and is prosecuted.
Due to this, insiders have access to inside information :
- his official position;
- agreement with the issuer;
- they are owners of the issuer’s shares;
- carry out state control or other professional activities;
- are relatives or are members of a close circle of friends of persons who have classified information.
For these reasons, insiders have an advantage over other investors – they have information about the current state of affairs of companies and therefore are able to foresee the fluctuation of the securities rate after publishing data on events that are still unknown to the general public.
How are insiders regulated
Insider information is subject to the laws that regulate insider activities.
This is necessary for the following reasons :
- to put all investors on an equal footing and prevent monopolization of financial markets;
- give the opportunity to earn on investments to a wide range of citizens.
Insiders are divided into primary, which have a direct connection with the company by the issuer, and secondary (they receive classified information from the first).
What measures are envisaged to regulate their activities:
- a person who has acquired 10% or more of the company’s shares must immediately provide this information to the relevant authorities;
- Persons who are insiders by virtue of their duties are required to report on securities transactions to the state body regulating this market;
- insiders are not allowed to pass on non-public information to third parties and make recommendations on transactions. It is also forbidden to use internal information for transactions in their own interests and in the interests of third parties;
- they can not carry out transactions involving the most acute forms of speculation;
- administrative sanctions and fines, as well as imprisonment , areprovided for in the UK , Germany and the USA .
Government agencies oversee the regulation of the securities market. Moreover, the regulatory authorities have the right to withdraw information to conduct an investigation.
In accordance with Russian legislation, insiders include :
- professional market participants bound by contractual obligations with the issuer;
- members of the issuer’s governing body;
- issuer’s auditors;
- government officials who have access to classified information.
Theoretically, any employee of the company, even a cleaner, can become an insider if she accidentally or intentionally found out about the company’s internal information. This can also be a representative of any organization that interacts with the company.
The concept of false insider information
It helps to manipulate the markets with the help of large media and the Internet , which significantly affects the stock quotes of companies.
A false interpretation or a lack of understanding of the statements of experts, politicians, and company executives can be a false insider . Or it can be a focused information stuffing from insiders.
Due to the urgency of the demand for insider information, the situation favors various types of fraud , which offers beautifully packaged soother to the thirsty for profit. False insiders help eliminate competitors, ruin a company to buy its shares cheaply.
Why is insider trading a criminal offense?
Such manipulation violates the conditions of fair competition, which is incomparable with the market economy and its requirements of equal conditions for all market participants.
As a result of the frauds, high-ranking officials of companies and a limited number of large shareholders receive excess profits to the detriment of the majority of small and medium-sized holders of securities, on whose investments, as a rule, the entire system rests.
If measures to combat insider trading were absent , the world economy would have been destroyed for a long time and we would not have observed its development.
But even with the active countering of the illegal activities of insiders, SEC analysts observe that about a third of all transactions on large stock exchanges are made as a result of using insider information . Therefore, everything is not as simple as it seems. But every self-respecting trader needs to be aware of this in order to understand the essence of what is happening in the financial markets.