Inside information: Overview, definition, and example
What is inside information?
Inside information refers to non-public, material information about a company or organization that could influence an investor’s decision to buy, sell, or hold securities (such as stocks or bonds). This information is typically obtained by someone within the company, such as an employee, executive, or insider, and is not available to the general public. The use of inside information for financial gain is illegal and considered insider trading.
For example, if an employee of a company knows that the company is about to announce a merger and shares that information with friends to help them profit from the stock price change, that’s using inside information.
Why is inside information important?
Inside information is important because it has the potential to affect the fairness and transparency of financial markets. If investors trade based on inside information, it can create an uneven playing field where some investors have an unfair advantage over others. The use of inside information undermines trust in financial markets and can lead to market manipulation.
For businesses and individuals, it is crucial to understand the legal and ethical implications of inside information. Insider trading is prohibited by law, and those found guilty can face severe penalties, including fines and imprisonment.
Understanding inside information through an example
Imagine an executive at a tech company learns that their company is about to sign a major partnership agreement with another company. If the executive decides to buy the company’s stock based on this non-public information before the news becomes public, they are using inside information to gain a financial advantage.
In another example, an employee at a pharmaceutical company is aware that their company’s new drug has passed clinical trials and will be approved by regulators. If the employee shares this information with others or uses it to buy stocks, they are engaging in illegal insider trading by using inside information.
An example of an inside information clause
Here’s how a clause regarding inside information might appear in a contract:
“The Parties agree to refrain from using any inside information, as defined under applicable securities laws, for personal gain or sharing such information with any third parties for the purpose of influencing securities transactions.”
Conclusion
Inside information is non-public, material information that can significantly influence financial decisions. It is important because its misuse, known as insider trading, can distort market fairness and lead to legal consequences. Businesses, especially those involved in financial markets, must ensure that their employees and insiders understand the importance of confidentiality and comply with legal standards to avoid insider trading.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.