For any big time or an average investor in the stock market, keeping tabs on all the happenings in the stock market could be more or less like a hobby to them. The adage that says that ‘where the treasure of a man is, there will his heart be’ is just the right words to describe active investors in the stock market. The fact remains that a lot of factors determine the prices and performance of stocks and one of them is the speculation that flies around.
The nature of the stock market is basically about buying into the ownership of a company at a fair or good enough price, and selling at a price that favors you. If you are familiar with the stock market, you must have heard about the term inside information on stocks.
You might want to ask, who is an insider? An insider is simply someone that is either a member of the board of a company, a top executive and people that are related to them that can access high profile information that is not meant for the public.
What is an Insider Information On Stock?
An inside information on stock is a tip off on a particular stock from someone who is in a position to know; it could be from an investor, a lawyer or a stock broker; and you invest in the said stock and made profits. The insider trading information to trade stock can be likened to when a punter is given a tip on the likely result of a fixed match.
Using insider information to trade stock is a serious offence that is punishable by imprisonment of the person found guilty of the offence; that is to show you the seriousness of the offence of using insider information to trade stock.
No doubt, investing in stocks especially for short term investors can be highly risky. It is a case of either you hit it big or you lose out. In most countries of the world, it is illegal for insiders to leak any information to the public that could affect the stock either positively or negatively.
However, even with such laws in place, insider’s still leak information to the public and loads of people either benefit from the information or run at a lost. In this article, I will discuss why insider tips is considered as illegal, I will also discuss few exceptions where you can use an inside tip to trade stock legally, and also how to use the insider information to make money on the stock market.
Why Insider Tips Is Considered Illegal
The use of insider information is considered illegal because if few targeted people have access to this insider information on stock and make massive profits for it, it will be unfair to other people who don’t have access to this insider trading information, and these other people will be discouraged from trading stocks because of unbalanced information and this will in turn affect the economy of the country if people pull out from trading stocks.
So to avoid this, the use of insider information is a termed serious offense by law. This not withstanding, insider trading information are constantly leaked in the stock trading market either intentionally or unintentional by insiders since they are the only people that have access to these insider tips. These are the ways insider’s information leak in the stock exchange.
10 Ways Insider’s Information Leak in the Stock Market and How to Profit from it
Table of Content
- a. Via the Personal Assistant of a Top Executive
- b. from the Mouth of the CEO
- c. from the Employees of the Company
- d. Family Members of Board Members of a Company
- e. Drivers of Top Executives of a Company
- f. Journalist
- g. Hedge Funds Investors
- h. Hackers
- i. Anybody that have Access to Vital Company’s Document
- j. The Company’s Lawyer
- If The Insider Information Was Gotten In Public
- Tips From Hedge Fund Analysts
- 1. Make Your Research For Confirmation
- 2. Don’t Place All Your Eggs In One Basket
- 3. Keep The Insider Trading Information a Secret
a. Via the Personal Assistant of a Top Executive
Most often, insider’s information leak in the stock market from the mouths of Personal Assistants of Top executives of companies with shares in the stock exchange. This is so because they are always present in high profile meetings where the future of a company is being discussed.
Say for example a P.A that has a relationship with a stock broker may likely inform the stock broker of the happenings in the company. The P.A might do it ignorantly, not knowing that the information he gave might affect the performance of the company’s stock.
b. from the Mouth of the CEO
Every information that comes from a CEO is usually weighed by investors. In some cases, some CEO mistakenly devours some information on the performance of their company during annual or staff meetings. Some of that sensitive information might influence the price of the company’s shares.
c. from the Employees of the Company
Sometimes when a company decides to downsize and lay off some of its employees, the employees might take it that the company is running at a loss and such information might influence the price of the companies stocks if leaked in the stock market.
d. Family Members of Board Members of a Company
There is certain business information that is supposed to be kept secret from family members. There are cases where due to emotions, some board members might decide to inform their spouse or any of their family members about the concern of their company and such information might easily get leaked in the stock market via a broker that is privy to such information.
e. Drivers of Top Executives of a Company
Normally after board meetings where vital issues about the future of a company is discussed, there is the probability of the discussion to continue in the car if two of the board members are been driven in a car by a driver. If such driver gets such vital information, who knows he might pass it across to a stock broker and the information can easily be leaked in the stock market.
Journalists have a way of getting information and they can go all the way to get information about a company which they have interest in. sometimes such sensitive information could be leaked in the stock market.
g. Hedge Funds Investors
The fact that Hedge funds managers are privy to insider’s information of most companies listed in the stock exchange makes it easier for them to leak such information to the stock market.
Hackers can go all the way to hack into a company’s server to get any information that is useful to them. Some of them go as far as selling the information they got to willing buyers in the stock market. Although this is illegal and a criminal offense, but some stock brokers still benefit for it.
i. Anybody that have Access to Vital Company’s Document
You can’t rule out the chances of cleaners or even an employee of a company coming across some vital document of the company that can influence the company’s stocks in the stock exchange. If the lay their hands on such information, they may decide to leak such information to a stock broker who in turn may leak it in the stock market especially when they know it will benefit them.
j. The Company’s Lawyer
No doubt, in the world of business people can go all the way in the bid to make money. Company Lawyers are always privy to sensitive business information that could influence the performance of a company’s stock in the stock exchange.
This is so because by virtue of the nature of their job, they are always involved in high level business transactions. Stock brokers can get information as regard the status of a company from the company’s lawyer especially when they are close or have a business relationship.
People generally benefit from insider’s information that is leaked in the stock exchange. For example if the information that is leaked has to do with investors taking over a company, there is the likelihood for the company’s share to appreciate in value, because generally, people might have the perception that the investors buying the company has seen the potential of profitability of the company and are willing to pump in money to actualize such potential.
On the other hand, if the information leaked has to do with management crisis et al, it could result to people selling off their shares because of the fear of the shares depreciating in value.
Exceptions Where You Can Use Insider Information On Stock Legally:
Remember that in earlier paragraph, I said that the use of insider information to trade stock is considered an illegal action and attracts a punishment of imprisoned. But there are several exceptions to this rule, where someone can legally trade insider information on stock. These exceptions include;
If The Insider Information Was Gotten In Public
Getting an insider tip on a stock in public makes the illegality rule invalid. Lets take for instance, you walked into a coffee shop to have a layette and couple of investors that came to have a quick coffee starts talking about the stock of a company you know which is predictable to go high the next day because a new CEO is taking over the company, and unknown to them, you over heard the details of this conversation.
If you learn of this information in the coffee shop and you send a message straight to your broker account to buy of the said stock and you make massive profits from it, you didn’t commit any offense because you got the information in the public.
Tips From Hedge Fund Analysts
These analysts work hard to analysis and give info to subscribers and most times, in the cause of their giving these analysis they end on dropping hints on stock information. Trading on such hints does not make it an illegal trade because making the analysis of the analyst open, automatically make the information public information.
Let’s assume that one way or the other you had access to these insider tips in a legal way, we will look at how to use this insider information to maximize profits from that particular stock;
How To Make Money In Stock With Insider Trading Information
1. Make Your Research For Confirmation
You got access to an insider trading information dos not make the information hundred percentage (100%) reliable. For instance, if the tip was that a company’s stock will skyrocket in a week’s time because the company is about to be merged with another company, it’s left to you to carryout a background check to know if the company will merge with another company. Confirmation that such an event is about to take place means that the tip you got is an authentic insider tip.
2. Don’t Place All Your Eggs In One Basket
Your confirmation of the insider trading tip still does not make it 100% sure. Don’t invest all your savings and earnings into a stock because you heard that the value of the stock is about to skyrocket, this is greed and may backfire on your finances if the said transaction does not take place. Am not against you investing based on insider trading information.
All am trying to say is that, no matter how sure you are of the tip, try to invest with caution. You can invest between 30% to 50% of your saving in the stock to make as much profits as you can. This way, if anything goes wrong, you still have 50% of your money to fall back to.
3. Keep The Insider Trading Information a Secret
Am not trying to encourage a self attitude in you, but if you have an insider trading information, it better to keep it to yourself or to few trusted friends and relatives that will not go about spreading the information. Why? The reason is because you may end up implicating your self and other people; and depending on how the offense is judged, the exemption clause may be lifted on the offenders for them to serve the required punishment provided by law.
In summary, this article has discussed why insider trading information is considered illegal and the punishment attached to it. I also went ahead to examine some exceptions where you can use insider trading tips to make money on stock market legally, and finally how you can use or apply these insider information to make money from stocks.
Finally, insider trading information on stocks are always leaked to the public by insiders, either by their close friends or relatives who they tell the tips, whatever way the information gets to you, you can take advantage of it and make some profits in the market except if you believe in the ethical efficiency of stock market, that is playing by the trading rules.
Frequently Asked Questions
What Is Stock Market Manipulation?
Stock market manipulation refers to the artificial inflation or deflation of the price of a security. Also known as price manipulation or stock manipulation, it involves the literal manipulation of a financial market for personal gain. It means influencing the behavior of the securities with the intent to do so.
How Do You Begin Investing In Stocks?
Here is how to invest in the stock market for beginners;
- Secure all the documents required for investing in stocks.
- Demat Account. A Demat account is that which will hold one’s shares in the name of the account holder.
- Trading Account.
- Linked Bank Account.
- Investing In The Primary Share Market.
- Investing In The Secondary Share Market.
Can You Tell People What Stocks To Invest In?
Sure, you can tell people what stocks to invest in as long as you have taken your time to study the trends in the stock market and you know the performance of various stocks that are traded in the trading floor. Please note that you can only reveal your stock picks if you’re not making over the average stock market return, plus a little. If you’re crushing it, it might be best to avoid sharing that. If you’re keeping a broad-based index fund strategy, just saying that will make most people not want to know more.
How Do Companies Get Inside Information?
Companies get inside information from friends, customers, associates, and vendors. Published sources may be daily newspapers; financial, trade, and association magazines; databases, government statistics, directories, technical manuals, and much else.
Is Trading On Inside Information Illegal?
Insider trading involves trading in a public company’s stock by someone who has non-public, material information about that stock for any reason. Insider trading is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences.
How To Make Money In The Indian Stock Market?
Here is how you can make money in the Indian Stock Market;
- Know the kind of a trader you are.
- Try and avoid the herd mentality.
- Never try to time the stock market.
- Have a disciplined approach for investment.
- Never let your emotions influence your judgement.
- Always have realistic goals
How Do Beginners Make Money In The Stock Market?
One of the best ways for beginners to get started investing in the stock market is to put money in an online investment account, which can then be used to invest in shares of stock or stock mutual funds. With many brokerage accounts, you can start investing for the price of a single share.
How Do You Earn Money When You Are Holding Stocks?
Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains.
Is It Illegal To Talk Up A Stock?
Yes, and as a matter of fact, market manipulation is prohibited in most countries, in particular, it is prohibited in the United States under Section 9(a)(2) of the Securities Exchange Act of 1934, in the European Union under Article 12 of the Market Abuse Regulation, in Australia under Section 1041A of the Corporations Act 2001, and in Israel.
Can Aggregated Insider Trading Activities Predict The Market?
It depends, but if the mispricing is market wide, then aggregate insider trading will predict future market returns. When current prices are too low, insiders in aggregate will buy stock. When current prices are too high, insiders in aggregate will sell stock.
Where Can You Find Insider Trading Data?
- Forbes has a semi-daily report highlighting some important insider transactions.
- Finviz features a free and searchable database of insider dealings.
- GuruFocus has a free searchable database of insider filings in the U.S. and an optional fee-based subscription for insider dealings in the Dutch and Canadian markets.
- J3SG is a free website (although sign-up is required to access all the features) with real-time updates on insider transactions and a vast and searchable database of insider and institutional ownership.
- The SEC’s Edgar database allows free public access to all filings related to insider buying and selling of stock shares.
- A number of financial information websites offer easier-to-use databases of insider buying.
- Canadian transactions are available on a government website and on financial websites.
What Does It Mean When Insiders Buy Or Sell?
Insider trading is using material nonpublic information to trade stocks and is illegal unless that information is public or not material. While insider buying is the legal purchase of shares by a senior executive or director of a company.
What Is Insider Activity?
Insider Activity provides the investor with insight into whether corporate insiders are net buyers or sellers of the company stock, and which company officers are participating.
When Should I Buy A Stock?
You should buy stocks when the market is down—and when it’s up and when it’s sideways. Investing is about reaching your financial goals, and that requires keeping your eyes on the prize in all sorts of market conditions.
What Stocks Does Warren Buffett Own?
Here are some of the major stocks that Warren Buffet own;
- AON (AON)
- Biogen (BIIB)
- Merck & Company (MRK)
- Organon (OGN)
- General Motors (GM)
- Warren Buffett
- Restoration Hardware (RH)
- Chevron (CVX)
How Is Insider Trading Detected?
Insider Trading is detected via market surveillance activities: This is one of the most important ways of identifying insider trading. The SEC uses sophisticated tools to detect illegal insider trading, especially around the time of important events such as earnings reports and key corporate developments.
What Stocks Does Elon Musk Have?
Elon Musk’s best investments include PayPal Holdings Inc., SpaceX, DeepMind, Tesla Inc., and The Boring Company.
When Should I Cash Out My Stocks?
A good rule of thumb is to consider selling if the company’s valuation becomes significantly higher than its peers. Of course, this is a rule with many exceptions. For example, suppose that Procter & Gamble (PG) is trading for 15 times earnings, while Kimberly-Clark (KMB) is trading for 13 times earnings.
How Does Warren Buffett Pick A Stock?
Warren Buffett pick stocks by looking at each company as a whole, so he chooses stocks solely based on their overall potential as a company. Holding these stocks as a long-term play, Buffett doesn’t seek capital gain, but ownership in quality companies extremely capable of generating earnings.
What Happens If You Accidentally Insider Trade?
You can get into serious trouble even accidentally, without any intent to violate the laws. Insider trading and tipping are considered violations of securities law because they give certain people an unfair investment advantage over other investors and therefore undermine the fair operation of the capital markets.
Can You Get Rich From Penny Stocks?
Yes, but they can also lose a lot of money. Just make sure you avoid low-liquidity penny stocks and you will be fine. Most penny stocks have a volume of around thousands of shares a day, but penny stock companies with breaking news could have a high volume of millions of shares in a day.
What Exactly Is Insider Trading?
This is exactly how insider trading works; insider trading involves trading in a public company’s stock by someone who has non-public, material information about that stock for any reason. … Insider trading is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences.
How Do You Know What A Good Stock Is?
You can know what a good stock is by analyzing the following areas;
- The first and most obvious thing to look at with stock is the price.
- Revenue Growth
- Earnings Per Share
- Dividend and Dividend Yield
- Market Capitalization
- Historical Prices
- Analyst Reports
- The Industry
What Is The Difference Between Insider Trading And Insider Information?
Insider information refers to non-public facts about a publicly traded company that could provide an advantage to investors. The manipulation of insider information to benefit an investor in buying or selling stock is known as insider trading and is illegal.
What Are The Penalties For Insider Trading?
The maximum sentence for an insider trading violation is 20 years in a federal penitentiary. The maximum criminal fine for individuals is $5,000,000, and the maximum fine for “non-natural” persons (such as an entity whose securities are publicly traded) is $25,000,000.
Is Learning To Trade Hard?
The truth is trading is not easy but it is also not “rigged.” Like any worthwhile endeavor, trading has a steep learning curve followed by ongoing challenges. Understanding the journey and the problems you will face at each stage can help you align your expectations with reality.
How Much Money Do You Need To Start Trading?
It should depend on the money you can afford, but if you must start trading right away, you can begin with $100. For a little more flexibility, $500 can lead to slightly more income or returns. However, $5,000 might be best, because it can help you produce a reasonable amount of income that will compensate you for the time you’re spending on trading.
As An Indian, How Can You Invest Into The Chinese Stock Market?
You can invest directly in Edelweiss’s only Indian mutual fund dedicated to Chinese markets, as well as other Asian-Pacific Region focused funds.
Does Following Insider Transactions Work?
Yes, and as a matter of fact, research supports the view that insider information works best in the aggregate. Stock prices rise more after insiders’ net purchases than after net sales. On the whole, insiders do earn profits from their legal trading activities, and their returns are greater than those of the overall market
What Is A Good Percentage Of Insider Ownership?
It depends, but insider ownership of 10 to 30 percent is generally a positive sign. If that ownership percentage is increasing over time, that’s an even better sign, because it means that key players are accumulating shares. It is advisable not to allow insider ownership to go too high.
What Does Insider Ownership Tell You?
High insider ownership typically signals confidence in a company’s prospects and ownership of its shares. This, in turn, gives the company’s management an incentive to make the company profitable and maximize shareholder value.
Does Insider Selling Mean It’s Time To Sell?
To a large extent, yes, and this is so because investors monitor insider buying and selling since buying activity is often seen as a positive sign that executives believe the stock will rise in the future. Conversely, insider selling can be seen that executives believe the company and its stock price may underperform in the future.
Who Are Insiders And Why Do You Buy Or Sell?
An insider is someone with either access to valuable non-public information about a corporation or ownership of stock equaling more than 10% of a firm’s equity. Insiders are legally permitted to buy and sell shares, but the transactions must be registered with the SEC.
How Can Insider Trading Be Avoided?
Well, the government tries to prevent and detect insider trading by monitoring the trading activity in the market. The SEC monitors trading activity, especially around important events such as earnings announcements, acquisitions, and other events material to a company’s value that may move their stock prices significantly.
What Stocks Did Warren Buffett Buy 2020?
- AbbVie (ABBV)
- Merck (MRK)
- Bristol-Myers Squibb (BMY)
- T-Mobile (TMUS)
- Verizon Communications (VZ)
- Chevron (CVX)
- Kroger (KR)
- Marsh & McLennan (MMC)
If You Use An App To Invest Your Money Into The Stock Market, What Happens If The App Shuts Down?
Basically, your portfolio will remain the same until you get the app back online.
Can You Short Berkshire Hathaway Stock?
To short Berkshire Hathaway stock, an investor borrows shares, sells them, and buys the shares back on the public market later to return them to the lender. Short sellers are betting that Berkshire Hathaway will decline in price.
What Are Some Risky Stocks You Can Gamble On For Fast, Large Returns?
- Aviat Networks (NASDAQ:AVNW)
- AcuityAds Holdings (NASDAQ:ATY)
- Fulgent Genetics (NASDAQ:FLGT)
- Zedge (NYSEAMERICAN:ZDGE)
- Kirkland’s (NASDAQ:KIRK)
- Big 5 Sporting Goods (NASDAQ:BGFV)
- Express (NYSE:EXPR)
- At Home Group (NYSE:HOME)
What Is The Best Way To Earn Money In The Stock Market?
Here are some of the best ways to earn money in the stock market;
- Buy and Hold.
- Opt for Funds Over Individual Stocks.
- Reinvest Your Dividends.
- Choose the Right Investment Account
How Do Companies Protect Personal Information?
The most common policies applied by big companies involve the use of tools specialized in data protection in the cloud or a limitation of the types of data that are stored in the cloud. Another strategy involves encrypting sensitive data before it is transferred to the cloud.
What Kind Of Customer Information Needs To Be Secured?
Passwords for forums where the customers market their businesses such as social media. Legal Documents numbers. Credit Cards: These should be protected for the safeguard of your hard-earned money. SSN Numbers need protection as well.
When Did Insider Trading Become Illegal?
The US Congress did not formally ban insider trading until 1934 when the first law on the topic was included in the Securities Exchange Act. Section 16(b) of that act forbids insiders from both buying and selling corporate stock within the same six-month period.
How Do You Know When Your Insider Is Selling?
The SEC’s Edgar database allows free public access to all filings related to insider buying and selling of stock shares.
Should I Buy Stock On Robinhood?
Yes, you can buy stock on Robinhood and these are the best Robinhood stocks to buy or watch now Tesla Inc (TSLA), Microsoft Corp (MSFT), and Alphabet Inc Cl A (GOOGL)
Why Do Some People Say That Day Trading Is Gambling?
Some experts believe that day trading is a form of gambling since it involves risking a small amount of money and expecting a bigger return.
Is Insider Buying Illegal?
Insider buying is not a crime when the buying is based on public information. Additionally, since insiders have unique insights into their own companies, they often gobble up often shares when they believe the stock is undervalued. That’s why people pay attention to insider buying.
How Does Illegal Insider Trading Information Get Outside?
Illegal insider trading information leaks through brokers, associates, and even family members. Please note that a person who becomes aware of non-public information and trades on that basis may be guilty of a crime.
Can A CEO Short Their Own Stock?
Yes, a CEO can short their own stock and it is called executive hedging, and it’s a lot more common than most people know.
How Much Can You Make A Month From Stocks?
You make 20 trades per month. 10 trades are losing trades, and you lose $300 per trade = – $3,000. 10 trades are winning trades, and you make $600 per trade = $6,000. This means that you now make $3,000 per month.
Is It Illegal To Promote A Stock You Own?
While promoting a stock isn’t illegal as long as required disclosures are made, in reality, most promotions are manipulative and therefore violations of the securities laws. Promotional materials must identify promoters and their sponsors, and the nature and amount of consideration paid for the promotion.
Can A Broker Sell Your Position Without Permission?
Your broker cannot sell your securities without getting permission from you. A financial advisor needs the proper authorization to execute any transaction on your brokerage account. Whether it is buying a stock, selling securities, or moving money around, unauthorized trading is a very serious legal violation.
What Are The Rules On Insider Trading?
An Insider should never trade the Company’s stock while you are in possession of material, nonpublic information about the Company. Additionally, you should not discuss or reveal such “inside information” about the Company to anyone, except as strictly required for a legitimate Company business purpose.
Can You Short Sell Stocks Under $5?
Yes, and as a matter of fact, short selling stocks under $5 can be a profitable venture. But given the high degree of risk, short sellers have to be well informed and very careful to avoid stumbling into a stock that is about to move higher. So, short selling is not recommended for inexperienced traders.
Why Is Pump And Dump Illegal?
Pump-and-dump is a manipulative scheme that attempts to boost the price of a stock or security through fake recommendations. These recommendations are based on false, misleading, or greatly exaggerated statements. This practice is illegal based on securities law and can lead to heavy fines.
Is It Illegal To Promote A Stock You Own?
While promoting a stock isn’t illegal as long as required disclosures are made, in reality most promotions are manipulative and therefore violations of the securities laws. Promotional materials must identify promoters and their sponsors, and the nature and amount of consideration paid for the promotion.