Trading

Insider Trading

Almost every week, while reading financial press, you notice a newspaper headline with two words in it: “Insider Trading”. Just this week the phrase appears in newspapers like the Wall Street Journal, Financial Times, Chicago Tribune and others. So what does it mean exactly?

According to Investopedia, it is “The buying or selling of a security by someone who has access to material, nonpublic information about the security.” In other words, when someone buys or short sell security based on information known only by people in the company, usually top management, and which is not available to public. News like acquisition of a company, issue of new debt, downsizing and many others can dramatically affect price of the stock and derivatives. Knowledge of this type of information before it is publically available can dramatically increase returns on your portfolio.

Court cases on insider trading are open all around the world- UK, Japan, USA are just a few of the countries. From Bloomberg’s article “Ex-Banker Girlfriends Doubled Money on Insider Trading” on October 16th- “These two women managed to almost double their money by trading on just one stock”. Bankrupt investor banker gave an advice to two wealthy women based on information about purchase of OCE by Canon Inc. back in 2009. In just 5 days they made a return of almost 200% on the stock. All three are now in court, and can be sentenced up to 7 years of jail time.

In the United States the number of FBI investigations in the fiscal year ending September 30th went up by 43 percent, according to Financial Times, compared to last fiscal year. Only in New York there were 300 people under investigation in February of this year. The biggest case in the history of insider trading is currently in the court rooms in New York. Former Goldman Sachs and Procter &Gamble Co. board member Rajat Gupta is accused of insider trading. He is expecting 8 to10 years of jail time for exchanging confidential...