In recent years, there has been a string of high profile convictions in the United States as part of the crackdown against insider trading. This has resulted in lot of media attention being given to the issue of insider trading. Before we launch insiders a fully-fledged discussion of trading intricacies of the issue, it would be useful to define the term and understand what insider trading is all about. Specifically, the term refers to the practice prevalent among corporate insiders who use the knowledge gained because of their contacts and position to trade in stocks and equities that would not have been otherwise possible if they did not have the inside information.
For instance, before a firm announces an acquisition or launches a new product line, several people within the firm have the knowledge beforehand.
As the stock might go up in value corporate the news is made public, there are chances for these insiders to use their knowledge to trade in the stock.
This is the barebones version of insider trading. The other aspect of insider trading refers to the practice wherein these corporate share trading knowledge with their strategies and acquaintances in other firms who might profit from this knowledge. This aspect has been the subject of the recent crackdown on insider trading in the United States. Having said that, it must be understood that many companies prohibit trading in their stocks by their employees before insiders quarterly and annual results are announced.
This is done to ensure that they corporate not profit from the inside information. However, many insiders insiders have found ways and means to circumvent this by sharing the knowledge with others outside the company and hence, share in the profits made in such trading activity. Insiders aspect of insider trading is hard to detect as the number of people trading the trading involved in such cases cannot be detected easily.
The corporate crackdown on strategies trading in the Strategies, which saw leading executives like Rajat Gupta, the former head of McKinsey implicated in the case, was done after regulators started tapping the phones of many corporate honchos who they suspected were involved in insider trading.
Further, the fact that insider trading is rampant in the corporate world is an open secret which strategies many people would acknowledge in public. This is the reason why it insiders more the reason for stringent action against insider trading as it not only harms the reputations of the companies but also gives the people involved in the activity an unfair advantage that the ordinary investors would not have. Apart from these aspects, insider trading is an activity that is also done by stock traders and many investors who use their contacts within the industry to gain corporate information about the stock movements and the upcoming announcements.
In Asian countries, it has been the case that the market regulators have been lenient insofar as insider trading is concerned because of the magnitude and the scope of the issue, which extends its tentacles into virtually every company. However, strategies recent crackdown has brought to the fore the need for stringent action in other countries as well which has translated into many companies seeking non-disclosure agreements from their employees about the knowledge they might have about inside information.
Further, the other ways and means to curb insider trading would be for companies to restrict the number of people with access to privileged information and trading the same time, monitoring the activities of those who they suspect could be indulging in insider trading. Finally, many companies are now asking their employees not to trade in the stocks of their companies without prior permission from the compliance department and this is seen as a move to have control over insider trading by employees.
It is hoped that these moves along with other strategies would restrict if not eliminate the menace of insider trading. Management Study Guide is a complete tutorial for management students, where students can learn the basics as well as advanced concepts related to management and its related subjects. MSG team comprises experienced faculty and professionals who develop the content for the portal. To Know more, click on About Us. The use of this material is free for learning and education purpose.
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