When I started my journey in the stock market 10 years back, then I was unsure few terms related to the stock market. Over time, I learned a lot many things which were never taught in the classroom. Guess that comes with time & experience. But when I’m here then you need to worry friends I’m here to make your journey a little easier which was not so possible a decade back. In this series, today we will cover What is Insider Trading in Stock Market?
What is Insider Trading in Stock Market?
As the name suggests someone from inside the company trading in the stock market. What does it mean? In general, an insider means a person or group of people within an organization having material or nonpublic information involved in the trading of their companies stock. In India, this kind of trading is considered illegal trading. This is simply unfair to other investors who don’t have access to this piece of information. Consequently, insiders with such information can make huge profits than a normal investor could make.
Our stock market regulator, SEBI, has made insider trading a crime under sections 12A and 15G of the SEBI Act of 1992.
When key employees or executives make use of strategic information about the company for trading in the company’s stock. It is an unfair practice as other investors are at a great disadvantage due to a lack of exclusive information.
Let’s take the example of insider trading. Suppose my husband is working in TCS and in our day-to-day conversation he discloses that the company is planning to launch software next month and we are anticipating that it will be a big hit in the market. Listening to this I decide to buy 1000 shares when the price of the shares traded at Rs.3800 per share. So I Invested around Rs.3800000/-. Next month company launched the software as scheduled and was a hit in its segment. Consequently, the price of the stock rose to Rs.4500 per share. Within a month, I could garner a profit of Rs.700000. Therefore, such trading will be referred to as insider trading as I had price-sensitive information that other investors were unaware of as my husband disclose this exclusive information as his team has designed that software.
BSE & NSE Insider Trading
Most companies issue insider trading warnings to their employees. SEBI has strict rules in place that govern when company insiders can trade in their company’s securities. All transactions that do not follow these rules are, in general, punishable under the applicable law. Therefore, the stock exchange regulated by SEBI implements the Prohibition of Insider trading Act to safeguard the interest of general investors and instill confidence in the trading.
SEBI directs all the listed companies to disclose all the events or information that is material in nature. Communication of UPSI( Un-Published Price Sensitive Information) whether oral or written is punishable if not done for a legitimate reason. In case, the company has disclosed such UPSI in an event informally. The company should report such incidents immediately to stock exchanges in the required format. In turn, SEBI will investigate respective employees and if found offensive will be punishable under the act.