Insider information – what is it in simple terms and can it be used?
If you watch financial news, you've probably heard about insider trading.
Most often, this phrase is used in the context of a trader or broker being punished for using certain information to make a profit on the stock exchange.
What is insider information? Simply put, it's information that is not generally available to the general public and that could influence the price of a particular stock.
So, for example, your friend who works at Gazprom told you 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, the 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, this includes merger and acquisition decisions, the signing of new laws and regulations, the imposition of sanctions and restrictions, and the content of speeches by top government officials. In other words, anything that somehow influences stock prices.
The most striking example is officials selling information about new laws even before they are published. Anyone with this information can easily profit on the stock market by making a trade in the right direction.
Punishment for using insider information to gain profit
It would seem that there is no reason to punish here. Well, he overheard someone telling someone something, and then went and bought a couple of million worth of shares.
At first glance, there is nothing wrong with this, but most countries punish such actions quite severely.
For example, in the United States of America, using insider information in trading can easily lead to 2 to 10 years in prison and a large fine.
Moreover, the law operates 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 trading sometimes reach several billion dollars.
In Russia, such a crime is also punishable by a fine and imprisonment for up to five years. However, in practice, this law is largely unenforced; proving hidden intent is rare, so Russian traders often go unpunished.
We, ordinary traders, rarely have to decide whether or not to use insider information in our trading, as it is not easy to access.
