Insider trading implies the access by individuals to a company's non-public information and the subsequent trading of a corporation's stock or other securities by them. Insiders are persons who are or were connected with a company and believed to be in possession of unpublished price sensitive information regarding that company’s securities. The information allows such persons to make considerable profits while also helping them avoid losses. This manner of trading can be illegal or legal and depends on when an insider decides on trading.
Illegal insider trading: Trading is considered illegal when executed at a time when information is still not available to the public because this handicaps investors who do not have access to such information. People who provide tips to others when they have access to nonpublic information therefore, are also engaged in illegal insider trading. Top executives of companies such as directors and some well-placed brokers or their family members can potentially be convicted of insider trading. For instance, a firm’s vice president of sales will know how many shares the company has sold and whether the company will meet the projections given to investors.
Legal insider trading: Insider trading is legal once the material information has been made public because by then an insider has no direct advantage over other investors. Even so, regulatory regimes and their watchdogs in most countries still require all insiders to report all their transactions. Therefore, as insiders have a direct insight into the workings of their companies, any knowledgeable investor will look at such reports to see how insiders are legally trading their stock.
Penalties: In India, the Securities and Exchange Board of India (SEBI) stipulates that an insider cannot deal in the securities of a company when he has access to any unpublished price sensitive information. A penalty of Rs 25-crore or three times the amount of profit made out of insider trading may be applicable on those convicted. The regulator can also initiate criminal prosecution and may issue orders to prohibit or dissuade an insider from dealing in the securities of the company.