What does insider trading actually entail?
To put it simply, having access to information that is not publicly disclosed about a company and that knowledge has the potential to materially affect the share price of that firm.
Example of insider trading
For example, let's consider TATA Motors India.
TATA debuted the Zest in the middle of August 2014. Only a few advertising companies and insiders were aware of this date's precise information. Currently, my brother works for TATA in the marketing division, and he told me in July that "our firm is launching a car next month that is going to be a guaranteed hit in its segment."
I then decide to purchase 1000 shares of TATA Motors on August 8 when the prices are around Rs. 428 after looking at its share prices, which have been persistently low. (428*1000 = 4,28,000)
The car will be unveiled the following week, and according to my brother, it is fantastic. The outcome? Within the following two weeks, share prices will soar.
Ten days later, I sell them for Rs. 513 per share (513*1000 = Rs. 5,13,000).
I made Rs. 85,000 in profits in just ten days!
Next, what? When the following TATA vehicle Bolt is released, I can repeat this procedure.
Who better understands a company's product, management, and future prospects than its own executives? Investors can lawfully profit from insider knowledge by monitoring public databases that track insider buying.
Tracking the purchasing and selling activity of a business's insiders, some argue, is an essential aspect of due diligence when investing in a firm. Here's how to go about it.
The situation may also be the opposite, in which I own 1000 shares of a company and learn that the company will report a loss at its annual meeting the following month, which will cause the share price to fall. As a result, I would sell my stocks right away and avoid doing so at a loss.
However, speculators, not investors, are the ones who typically engage in this, and over the long term, your portfolio suffers as a result.
Insider Trading's Effect on Investment Returns
A rise in the promoter's ownership typically signifies their belief in the business. Promoters growing their ownership holdings in their own business is seen favourably by the market and investors alike. It shows that the company's promoters are optimistic about its future prospects and anticipate that it will outperform its competitors. Investors have profited historically by making investments in businesses where promoters have increased stakes.
This isn't always the case, though. Even when the firm's promoters are purchasing shares, a stock can decrease due to a weak market and weak corporate fundamentals. Therefore, in the long run, the foundations are insurmountable.
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