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.
Table of Content
- What is an Insider Information On Stock?
- Why Insider Tips Is Considered Illegal
- 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
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
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.