What is Insider Information?

Mary McMahon
Mary McMahon

Insider information is information with a potentially material impact on a company's value, known only to people who work in a company or who are entrusted with it in the course of their work, such as attorneys used as consultants by the company. If people make investment decisions on the basis of insider information, they can be charged with insider trading, a criminal offense with some potentially serious penalties. Exploiting such information for personal gain is seen as a breach of trust and an unfair advantage.

Man climbing a rope
Man climbing a rope

People in possession of insider information can include company owners, board members, supervisors, and ordinary employees. People like law enforcement, attorneys, and person physicians can also have access to this kind of information. Information about pending litigation, product recalls, and other problems with a company, as well as mergers under consideration and other events that may raise a company's stock value are all examples of insider information. If the information is not being made generally available to the public in disclosures and people have been asked to keep it confidential, it is insider information, even if the company plans to release it in the future.

While people who work with and for a company are usually allowed to buy and sell stocks and other securities issued by the company, they are expected to do so only on the basis of public knowledge. Their activities may be audited and monitored closely for any signs they are behaving unethically. Someone who sells or buys securities on the basis of restricted or confidential information can be penalized.

This applies not just to company employees, but to anyone who obtains insider information. Misappropriation, as it is known, involves using insider information about a company someone is not directly affiliated with for personal profit. People may obtain such information in a variety of ways and if their trading activities can be traced to unauthorized access to confidential information, they may be subject to legal penalties.

Protecting insider information is not just relevant to securities trading. People with information about pending product releases, inventions, and other topics could potentially sell trade secrets to opponents. This could give an opponent an unfair advantage and may set off a patent war. Fair competition is based on the understanding that companies conceal information favorable to their interests as long as it is legal to do so, and leaks of information can have a devastating impact on a company's pending releases, revamps of old products, and other activities.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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