Definition of Insider Trading
Insider trading is a phenomenon about using hidden or not publicly available information to obtain extra advantage while making investment decisions. An insider trader can be a part of management or a board member or anyone possessing crucial information about prices of securities. This practise is unethical and in many jurisdictions illegal and may result in imprisonment if proved.
How Insider Trading Works:
Normally when an investor thinks of investing in stocks, he/ she gathers information available in the market about a single or multiple stocks of various companies. A normal investor can access all the information that is publicly available, based on this information he might decide to buy some stocks in a company as he thinks the prices are going to increase. But an insider trader has some information that other investors lack, that the prices are about to fall due to poor performance of the company and decide to sell all his stocks before the price actually fells, and hence save his loss.