Insider trading involves trading based on information that, by definition, belongs to a company. Individuals in the organization possess corporate information as trustees and are therefore prohibited from using such information for personal gain.
The law is designed to prevent transactions in which individuals with access to important corporate information have an advantage over the general investor public who are not privy to the same information.
The individual who has access to the information may disclose the information to the public, As long as the information is nonpublic, it is forbidden to trade based on it.
Examples of Insider Trading:
1. A vice president of a public company is negotiating with a foreign company over a contract for the marketing and distribution of the public company's products overseas, a move that is expected to have a significant impact on the company's financial results over the next few years. After the negotiations were concluded, but before the VP travels to the signing ceremony at the foreign company's offices abroad, the VP purchases the public company's shares on the Stock Exchange. One day after signing, the company issues an immediate report announcing the company's new marketing and distribution agreement.
2. A public company is a client of a public relations and investor relations firm. In the course of his job, an employee of the PR firm receives information and data from the public company's VP about material transactions and immediate reports that the company is about to issue, so that the employee can prepare press releases in advance and notify investors and the media immediately after the immediate reports are published. The employee purchases the public company's shares after receiving the information from the VP about anticipated fundamental transactions, before the company makes any formal announcement to the public.
3. The secretary to the CEO of a public company was asked by the CEO to prepare documents for a contract that the public company expects to sign and that will have a material effect on the public company's revenues. After the secretary reads the contract and understands its significance, and after having witnessed the negotiations leading up to the contract, she tells her father and her spouse that the company is scheduled to sign an important contract that day. Her father and spouse quickly buy the public company's shares. The company issues an immediate report to the public about the new contract the following morning.
For more information on insider trading, see Chapter VIII 1 of the Securities Law, 1968: Restriction on the Use of inside Information.