Insider trading gets thrown around a lot. But what does it actually mean?
The term insider trading gets thrown around a lot. There’s the movie Wall Street. There’s the podcast The Sure Thing. But what does it actually mean?
Insider trading is when a person uses information not available to the public to buy or sell an asset. This could be done to make a profit OR avoid losses. And, it's illegal.
It is generally done by someone who has behind-the-scenes information about the company (aka, info that isn’t public knowledge) and it is material (ie knowing this info would likely change the price of the shares)
Let’s just say you work at Jane’s Toy Store, a publicly-listed company. Your company’s arch rival is Harry’s Toy Store (also publicly listed)
On Monday morning, you get an internal (and confidential) email from your boss that mentions that Harry’s Toy Store is looking to acquire your company.
The next day, you buy shares in Harry’s Toy Store because you know that investors will view this information positively and the share price will likely rise.
Once the acqusition goes through, you sell your shares in Harry’s Toy Store for a $50,000 profit.
Let’s break it down:
This is likely to be deemed insider trading. And not only can you be fined for it - you can even be thrown behind bars.
You can! But not based on material and non-public information you receive because of your position at the company.
Sign up for Flux and join 100,000 members of the Flux family