Insider (trading)

economic-dictionary

An insider is a person who, due to his personal or work circumstances, has privileged information. The insider can participate in the market by buying or selling shares of the company in which he works, requesting prior authorization from the regulatory body.

Insiders are those people who have information that places them in a privileged position compared to other investors. In most countries it is prohibited to carry out investments in shares of the companies of which they possess the inside information.

For this reason, there are certain regulatory bodies that are pending at all times to detect possible anomalies in the market.

Who is an insider?

As we mentioned in the heading of this article, an insider is anyone who has inside information about a company. The most common thing is that the so-called insiders are those people who occupy high positions within a company.

This is because they are the easiest to obtain privileged information. Your job position requires you to make use of this information to close certain operations, draw up annual accounts, reach agreements with suppliers or analyze the evolution of the company's activity.

In addition to this, the members of the family unit closest to the manager are also considered insiders. On the other hand, certain suppliers of the company can be considered insiders due to the information with which they work. Within this group we could find the company's lawyers or the bank director who grants loans to the company.

Insider trading investment strategy

There are certain investors who invest based on what the insiders do. The behavior of this type of personalities on the actions of the company they lead, provides very useful information regarding the situation of the same.

In the event that an insider makes a purchase of shares, it will be assumed that they expect a greater economic performance from the company, making it grow and improving its situation. If, on the other hand, the insider sells shares in his company, it is suspected that these shares are overvalued and will fall in price.

Whatever the behavior of the insider, the investor must do the same as him if he wishes to carry out this investment strategy. Most likely you are wondering how you can know what an insider does. As we have mentioned before, these types of actions are penalized by the regulatory body if they are not carried out in the correct way.

For this reason, both purchases and sales made by an insider of a company about which they have privileged information must be public. There are different web portals that collect this type of information and offer it to their users so that they can use it in their investment.

Insider trading example

Suppose we are the CEO of an energy company listed on the Madrid Stock Exchange. We are near the end of the year and the annual accounts will be presented soon. It has been a very positive year for the company and the results are going to be more than interesting for investors.

In this sense, we decided to make a purchase of shares since we consider that they will be revalued when the annual accounts are presented. Before carrying out any operation, as we are on the Madrid Stock Exchange, we must request authorization from the competent authority. In this case, we will request it from the National Securities Market Commission (CNMV).

Finally, if we receive the approval of the application, we will make the purchase of the package of shares of our company.

In conclusion, the insider is a person who has inside information about a certain company. The insider is totally prohibited from taking advantage of said information for personal gain, unless it has been authorized by the competent body.

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