Insider trading: meaning and definition

What is insider trading

Insider trading means buying or selling a security while you hold important information about it that the public does not have.

"Insider" does not only mean a company director. It covers anyone who has the information because of their position, and anyone they pass it to.

A hypothetical example

A company listed on a stock exchange is about to announce that a larger firm will buy it at a price well above the current market price.

• An accountant at the company sees the draft agreement before the announcement.
• She buys shares in the company through a relative's brokerage account.
• After the announcement, the share price jumps and the relative sells.

The profit came from information the market did not have. That is insider trading. It does not matter that the trade went through someone else's account. The relative can also be liable if they knew where the information came from.

Formal definition and edge cases

In regulatory language, insider trading usually needs all of these:

1. Inside information: information that is specific and not public, and that would likely change the price if it were published.
2. Possession: the person trades, or advises someone else to trade, while holding it.
3. Connection to the issuer: the information relates to the security or its issuer, directly or indirectly.

Edge cases:

• Tipping. Passing inside information to someone who then trades is usually an offence. This applies even if the person who passed it on makes no trade.
• Legal insider dealing. Directors may trade their own company's shares. They must do it outside closed periods and report the trades publicly.
• Mosaic approach. Putting together many pieces of public information into a non-obvious conclusion is analysis, not insider trading.
• Rumours. Trading on market gossip is not insider trading by itself. If the rumour came from a leak by an insider, it can become a problem.
• Derivatives. In many markets, the rules also cover options, futures and CFDs on the affected shares, not only the shares.
• Front running. This is a related but separate abuse. A broker trades ahead of a client's order. See front running.

Insider trading law in Pakistan

In Pakistan, the supervisor is the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. Insider dealing in listed securities is prohibited under Pakistani securities law, and the SECP handles enforcement.

For the exact sections, penalties and closed-period rules, read the current law text and notices on the SECP's official site. This page does not set out those details.

Where you see the term

• News. Regulators publish enforcement actions, and the press reports them. Unusual price moves just before major announcements often lead to questions about leaks.
• Company reports and exchange notices. These include director dealing disclosures, insider lists and closed-period notices.
• Broker compliance. Brokers have to watch client trading for market abuse. See compliance.
• Platforms. Trading platforms do not label trades as "insider". You only see the price effect after the news is public.

Price jumps on news show how fast prices can move. Leveraged trading, such as CFDs, can lose money quickly when news hits.

Related terms

• Front running
• Compliance
• Derivatives
• Buy the rumour, sell the fact
• Circuit breaker
• Delisting
• Fundamental analysis
• Regulation and Safety
• Trading glossary

Frequent questions

What is insider trading in simple words?

It is trading a security using important information that the public does not have yet.

Is all insider trading illegal?

No. Insiders such as directors may trade their own company's shares legally. They must follow the reporting rules and avoid closed periods. Trading on non-public price-sensitive information is the illegal part.

Who regulates insider trading in Pakistan?

The SECP supervises securities markets in Pakistan. Check the SECP's official site for the current rules and penalties.

Is acting on a tip from a friend insider trading?

It can be. If the tip is non-public, price-sensitive and came from an insider, trading on it can be an offence for both people.

Does insider trading apply to forex?

The rules mainly cover securities and their derivatives. Leaks of other non-public data, such as government or central bank information, can fall under other laws.