Insider information - what is it in simple words and can it be used?
If you watch financial news, you've probably heard about insider information.
Most often, this phrase is used in the context that one of the traders or brokers has been punished for using certain information to make a profit on the stock exchange.
What is insider information? If we explain that this is in simple words, this is information that is not available to a wide range of people and can affect the price of a certain exchange asset.
That is, for example, an acquaintance of yours who works at Gazprom said that in a couple of days the company’s management will announce record profits for this year.
What information is considered insider information?
First of all, those that are known only to a certain circle of people - government officials, management of companies whose securities are traded on the stock exchange, tax authorities, employees of audit firms, employees of stock exchanges and central banks.
As for the information itself, it can include decisions on mergers and acquisitions, the signing of new laws and regulations, the introduction of sanctions and restrictions, the content of speeches by top officials of the state. In other words, everything that somehow affects stock exchange rates.
The most striking example is the sale by officials of information about the emergence of new laws even before their publication. A person who knows this information can easily make money on the stock exchange by making a transaction in the right direction.
Punishment for using insider information to make a profit
It would seem that there is nothing to punish here for, well, I accidentally heard someone telling someone something, and then went and bought a couple of million shares.
At first glance, there is nothing reprehensible here, but most countries punish such actions quite severely.
For example, in the United States of America, using insider information in trading can easily result in 2 to 10 years in prison and a large fine.
Moreover, the law works not only on paper; in 2011, American billionaire Raja Rajaratnam was sentenced to 11 years in prison for violating the law. And fines imposed for insider knowledge sometimes reach several billion dollars.
In Russia, such a crime is also punishable by a fine and imprisonment for up to five years. True, in practice this law practically does not work; it is quite rare to prove hidden intent, so Russian traders often go unpunished.
It is quite rare for us ordinary traders to decide whether to use insider information or not in our trading, since it is not so easy to access it.