What is Insider Information?

Insider information refers to a non-public facts regarding a publicly traded company's conditions or plans which can provide financial benefits in a securities market.

What Qualifies as Insider Information?

Insider information refers to a non-public fact regarding a publicly traded company's conditions or plans which can provide financial benefits when utilized for buying or selling shares of that or the securities of another company. Being knowledgeable about a company's major, confidential, and corporate developments, like a new products release, can provide unfair advantage supposing the information isn't public, that is, if only very few individuals are aware of the developments. 

Insider information is usually gained by an individual who works within or close to a listed company. Insider trading is termed illegal in a situation where the material information hasn't been publicized and has been traded on. This is solely because trading on insider information is considered to be an unfair manipulation of the free market to favor certain parties. It weakens overall investor confidence in the markets integrity and can lessen economic growth.

Regulating Insider Information and Trading

If someone utilizes insider information to place trades or enter trading positions, he or she can be found guilty of insider trading. Such a person can be found guilty supposing they tell a third party to place trades in line with the information, irrespective of whether the insider themselves got financial gains from the wrong information. In the U.S., the Securities and Exchange Commission (SEC) regulates legal insider trades, where corporate insiders like directors, employees, and officers, purchase and sell stock in their own companies. 

This trading type is allowed but is subject to specific regulations, many of which were encoded in the Securities Exchange Act of 1934. United States courts, as well as, lawmakers have broadened the enforceable definitions of insider trading since passing the law, through loophole-closing legislations, as well as, high-profile securities fraud decisions. The Congress, in 2000, passed Regulation Fair Disclosure (REGULATION FD), which was supposed to restrain companies selective disclosure of information to specific shareholders or other traders; it states that whenever a firm is revealing former non-public information to a willing party, its mandatory that they make the information accessible to all traders and public. 

The Securities and Exchange Commission prosecutes trading because of insider information as a major fraud offense and people found guilty can either be imprisoned or heavily fined. Martha Stewart, the business mogul and personality, was indicted in 2003 for securities fraud, as well as, other charges after she traded to prevent a loss based on insider information. She was imprisoned for five months and was also fined $30,000.