Inside information is the material information regarding an entity, which only the board of directors, management, or/and employees and not the public is aware of. The Security and Exchange Commission (SEC) prohibits any sort of trading, which is based on this kind of information. Such an information is highly confidential and if a person knows about the significant corporate information and developments of the company (for example, releasing of new products), then it could give him/her an advantage that would be unfair to the public.
In America, the SEC has regulated inside trading legally and insiders at the corporate level, including directors, employees and officers can sell and purchase stock in their own entities. However, the SEC does investigate incidents that are related to illegal insider trading. Those who are caught are subjected to both imprisonment and fine.
What Constitutes Inside information?
Inside information includes all those information that has not been revealed before the public and if they were disclosed before the public, could affect the security’s value significantly. Such information can be related to an issuer, a security or even securities market as such. Thus, inside information could for instance include any of the following:
- Orders for trading
- Upcoming corporate restructuring
- Redemption or purchase offer
- Issue of share
- Decreasing of a share’s nominal value
- Contents included in the statements or interim reports
- Division or assimilation of series of shares, etc.
According to the securities markets act, there are basically two types of insider viz. primary insider and secondary insider. While the primary insider has significant inside information owing to his/her position, responsibility or employment within the company. Such a person can also obtain inside information about the company since he/she holds the shares of the issuer. On the other hand, the secondary insider is a person who knows or should have been aware of the fact that the information lying with him was or is inside information. Such a person is not allowed to use inside information for trading of securities. In addition to this, an insider also does not have the right to use inside information for advising other people when they are looking to indulge in transactions pertaining to securities.