Term of the Day : Insider Trading

A citizen of India who worked as IT contractor has agreed to settle the insider trading charges that were slapped on him the Securities and Exchange Commission (SEC) of the United States. The case has been settled after paying a penalty of USD 800,000.

What is insider-trading?

• Insider trading is the un-ethical practice of dealing with stocks of a company or on the stock exchange based on some confidential information for one s one advantage.
• Insider trading is detrimental to the concept of free markets as one person benefits at the expense of others due to having an unfair advantage in publically available information.
• In the current case, the accused misused his position as a senior software consultant at an investment bank to gain insights into sensitive information about several proceedings.
• He then used this information to trade stocks in the concerned companies and made money.

Past Incidents

The founder of Indian School of Business, Rajat Gupta had been earlier convicted of insider trading in the United States and was sentenced to Two years in prison.

The Big Picture

Insider trading and the losses resulting from it can be avoided if the companies are more open about their internal proceedings. However, most companies are not ready to share critical information with every one and this leaves most investors in the dark. For free market conditions to exist, all unfair practices like insider trading, protectionism, subsidiaries, etc must not exist. However, this is not possible in practice.