What it means
The legal test usually turns on two words: material and non-public. Material means a reasonable investor would consider the information important when deciding whether to buy or sell, and non-public means it has not yet been released to the market as a whole.
A pending takeover, an unannounced profit warning or the loss of the largest customer would all qualify. It matters far beyond the trading floor, because ordinary employees of listed companies hold this kind of information all the time.
Finance staff see results before they are published, sales staff know when a major contract has been won, and personal assistants often see board papers first. Penalties can include fines, disgorgement of profits, dismissal and, in serious cases, imprisonment.
Companies manage the risk with a set of standard controls rather than trusting judgement alone. These typically include closed periods before results announcements when staff may not trade, an insider list recording who holds sensitive information and when, and a pre-clearance process requiring written approval before any share transaction.
Most groups also restrict dealing in the shares of customers and suppliers where inside knowledge might arise. An important nuance is that not all trading by insiders is unlawful.
Directors buy and sell shares in their own companies routinely, and those transactions are legal provided they happen outside a closed period, are cleared in advance and are properly disclosed to the market. What makes a trade illegal is the information behind it, not the seniority of the person making it.
A second nuance is that liability extends to people who never worked for the company at all. Lawyers, auditors, printers, consultants and even a family member told over dinner can all be caught, because the rules follow the information rather than the employment contract.
Deliberately passing on a tip without trading yourself, sometimes called tipping, is treated as an offence in its own right.
In practice
Real-world examples.
Example
A financial controller at a listed manufacturer sees draft results showing a large earnings shortfall three weeks before publication. She sells part of her personal shareholding ahead of the announcement, and the compliance team identifies the trade during a routine review against the closed-period calendar. The company reports the matter and she is dismissed.
Example
A paralegal at a law firm advising on a takeover mentions the deal to a friend, who buys shares in the target the following morning. Both are exposed, because the tipper committed an offence by passing the information and the friend committed one by trading on it. Neither works for the company whose shares were bought.
Example
A logistics supplier learns that a listed retailer is about to cancel a national distribution contract. An employee shorts the retailer's shares before the news is public, and the trade is flagged by market surveillance because of its unusual timing and size.
Think of it
“Insider trading is trading on secret information-using non-public info for profit.
Case study
Seen in the real world.
Halberd Instruments is an invented listed engineering group used purely as an illustrative example. Its board approved an unexpected acquisition on a Tuesday, and the announcement was scheduled for the following Monday. Six people knew, and the company secretary added all six to the insider list that afternoon.
One of them mentioned the deal to a colleague in a corridor conversation, and that colleague bought shares on the Wednesday without asking anyone. When the announcement lifted the share price sharply, the trade appeared on the routine dealing report and the compliance team escalated it within a day.
In this fictional example, the outcome was not a dramatic prosecution but a costly and avoidable mess. The employee resigned, the company reported the matter to its regulator, and legal fees ran to several times the profit made. Halberd rewrote its policy so that everyone added to an insider list receives a written notification explaining exactly what they may not do and for how long.
Watch out
Common mistakes.
- Believing that only directors and senior executives can be insiders, when contractors, advisers and administrative staff frequently hold material non-public information too.
- Assuming that a small trade is beneath notice, since market surveillance systems flag unusual timing rather than unusual size and the value involved does not change the legal position.
- Thinking that telling someone else is safe because you did not trade yourself, when passing on the information is itself an offence in most jurisdictions.
Questions
People also ask.
Can a director ever buy shares in their own company?
Yes, provided the purchase falls outside a closed period, has been cleared in advance under the company's policy and is disclosed to the market as required.
What if the information came from a rumour rather than internal documents?
Source does not settle it, because the test is whether the information is material and non-public, so a well-founded rumour picked up internally can still create a problem.
Does the rule apply to private companies?
The criminal market abuse rules generally apply to traded securities, though private company share dealings can still breach confidentiality obligations and directors' duties.
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