June 06 , 2012
Top managements of a company typically know about the performance and affairs of the company before the market does. Similarly, they may take some decisions that could impact the companys profits and share price in a big way. Insider trading is an illegal practice wherein the managers try to utilise this information to make money off their own stocks. It is a serious punishable offence in India and most other countries.
For instance, a company may be about to declare an acquisition. The management would know that this news would boost the share price. Thus, one of the senior managers might be tempted to buy shares of the company in his wifes name, just before the announcement, and sell it just after. This would amount to insider trading.