Insider trading

Insider trading is an illegal practice whereby a person or organisation trades in shares or options of a company knowing information that is not accessible to the public, and thus gains advantage from this.

An example may be that you know that a company is going to be taken over before it is announced to the stock exchange. Knowing that such a move is liable to cause the price to rise, you buy shares in the company, and subsequently profit from the transaction.

This practice is illegal in all countries and exchanges, and whenever a take-over, or major deal takes place, persons who placed larger deals before the event may be investigated.

Within a company, there are many people who might have access to information that might be construed as privileged to their position in the company. Nevertheless, they may wish to trade in the shares of their company (e.g. selling share options). To ensure that their employees can easily comply with the regulations, these companies will often publish dates when managers and senior staff members can trade in shares of the company without breaking the law.

In practice, prosecutions for insider trading tend to be rare and difficult to achieve for a variety of reasons. It can be difficult to prove what the individual(s) accused of insider trading actually knew at the time the trades were made - and people may not even be told directly but merely advised to buy or sell with a nudge and wink. Proving that a particular individual was responsible for a trade can also be difficult, because a clever trader can hide behind a variety of nominees, companies, and proxies, some of which may be located offshore in jurisdictions that don't cooperate with the local authorities. Insider trading is usually performed by the already wealthy, who can afford the best lawyers available and have the resources to drag a case out and cost the prosecutors millions along the way. Finally, the details of insider trading can be highly confusing to non-experts and convincing a randomly-selected jury, many with no experience of share trading, that a crime was committed can be difficult.