The core of applicable legislation define “insider trading” as “purchasing or selling a security in breach of a fiduciary responsibility or other relationship of trust and confidence, on the basis of substantial, nonpublic information about the security.” Let’s break down all of this legalese into manageable chunks.
Let’s begin with the individual in the trust relationship – the Insider. An individual is referred to as a “insider” if their relationship with a company allows them access to information that has not yet been made public.
Insider information is considered “material” if it’s the sort of intel that could and most likely would affect a company’s stock price
It is the unfair influence of a securities transaction by knowledge from insiders in companies received by certain people whose securities are traded by those companies, giving them an unfair advantage of profiting in transactions concerning the company’s trading value ahead of others in the market. This is an illegal behavior that should not be tolerated.
It occurs when a stockholder or trader has a relationship with an insider in a publicly traded firm or company who provides this investor with insider information about market price movements in exchange for a financial reward, allowing this trader to make informed decisions in transactions that inevitably favor them.
It is unethical and wrong. It undermines investor confidence in the fairness and integrity of the securities markets, it gives an investor an unfair advantage and unwarranted privilege over other stockholders who should all have equal opportunities and advantages. This is opposed to the fairness principle, which states that everyone should have equal chance and that all decisions should be made based on suitable criteria, without undue partiality or improper prejudice.
Insider trading harms the company by empowering specific individuals or groups to make transactional decisions that, if not handled carefully, can destroy the company’s financial condition, as has been the case in numerous documented cases.
we can reference to a teacher who offers exam questions to a specific student in exchange for money or some other type of compensation, owing to the student’s status or influence. This allows the student to easily prepare for those exact questions and pass the examinations, giving him an unfair advantage over other students who should all have the same opportunity as him.
Insiders carry a fiduciary responsibility to their companies and shareholders. Fiduciary means duty of loyalty or a duty of care. Therefore, the Insider using material information to their personal benefit puts them in direct conflict of interest with those they have a duty to.
Truthfulness in Financial Reporting