Insider dealing/trading

Insider dealing (also called insider trading) is the buying or selling of company shares based on knowledge not publicly available. Directors are often in possession of market-sensitive information ahead of its publication and they would therefore know if the current share price is under or over-valued given what they know about forthcoming events. If, for example, they are made aware of a higher than expected performance, it would be classed as insider dealing to buy company shares before that information was published. Similarly, selling shares in advance of results publication indicating previous over-valuation, would also be considered as insider dealing.



Why is insider trading unethical and often illegal?

By accepting a directorship, each director agrees to act primarily in the interests of shareholders. This means that decisions taken must always be for the best long-term value for shareholders. If insider dealing is allowed, then it is likely that some decisions would have a short-term effect which would not be of the best long-term value for shareholders. For example, businesses which are about to be taken-over often see a significant rise in their share price. In this situation directors might purchase shares in their own companies, seek potential buyers for the company and recommend the sale to shareholders, in order to make a profit on their own share investments. For this reason, a blanket ban on insider dealing ensures that such short-term measures are not taken.

There is also the potential damage that insider trading does to the reputation and integrity of the capital markets in general which could put off investors who would have no such access to privileged information and who would perceive that such market distortions might increase the risk and variability of returns beyond what they should be.




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