Closed-Market Transaction - Explained
What is a Closed Market Transaction?
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Table of ContentsWhat is a Closed-Market Transaction?How does a Closed-Market Transaction Work?Example of a Common Closed-Market TransactionAcademic Research on a Closed-Market Transaction
What is a Closed-Market Transaction?
Closed-market transactions are a type of inside trading. This type of inside trades does not change the price of securities in the open market neither does it reflect the insider's subjective opinion of the company. It occurs when an insider decides to sell or buy restricted securities from within a company's treasury. Here the price is decided by the insider, the price could be above or lower than the market price. The trade must follow the SEC rules and regulations and it is mandated that the shares must be sold to or bought by the company.
How does a Closed-Market Transaction Work?
A closed market transaction is different from an open market transaction. In a closed market transaction, a company employee buys or sells stock options or shares to the company. The details of this trade are documented by the SEC and it is between the insider and the company. On the other hand, an open market transaction involves the stocks or shares available through the open exchange. The open-market transaction is the opposite of a closed market transaction.
Example of a Common Closed-Market Transaction
A good example of a closed market transaction is when a company had decided to issue stocks to its employees as a form of compensation or others. Here, the company initiates the trade, and it is between the employee and the company. Personal or biased opinions about the sticks do affect the market price unlike an open market transaction, where this opinion can influence market prices. Also note that open-market transactions from company insiders are also allowed but this is not a closed market transaction, in as much as proper documentation is in place this trade is legal.
Academic Research on a Closed-Market Transaction