Insider Trading

The law makes it unlawful for an “insider” to communicate material nonpublic information about a company and its

securities to any person whom the passer of the information knows or has reason to believe will likely buy or sell those

stocks on the basis of such information.

The tips that insiders are prohibited from disclosing in private are those that would influence an investor to sell his existing

stocks or buy more of them, or buy the stocks of other companies.

Thus, for example, an owner of mining shares may be induced to quickly sell them upon learning from a friend who works

as the company’s mining supervisor that its concession area is close to exhausting its resources.

By the time that information becomes public and brings down the price of the stocks, the pre-advised stockholder has

already unloaded his stocks with profit or minimal losses, if any.

Prohibition

In the same token, if the same stockholder gets inside info that a rich mining lode has been discovered, he would be

motivated into buying additional shares before the public announcement of the finding causes the stock price to shoot up.

Whether favorable or unfavorable, the law requires that material information should be disclosed or made available to

all investors at the same time, and not just to a select few who happen to have good relations with the bearer of the

information, so they can all make an informed judgment on their investments depending on their appreciation of the

situation.

The ban on insider trading rests simply on the principle that all stockholders, regardless of the number of shares they

own or their degree of proximity to the people who have access to significant company facts and figures, are entitled to

equal and fair treatment.

Understandably, like other aspects of life that involve money, this prohibition does not sit well with people who want to

take advantage of their strategic position in the capital market chain (read: simply greedy) to gain more profits.

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Definition of “Insider Trading”

The buying or selling of a security by someone who has access to material, nonpublic information about the security.

Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material

information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access

to such knowledge. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic

information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as

brokers and even family members can be guilty.

Insider trading is legal once the material information has been made public, at which time the insider has no direct

advantage over other investors.

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Insider trading occurs when someone makes an investment decision based on information that is not available to the

general public. In some cases, the information allows them to profit, in others, avoid a loss.