When people become aware of a company's insolvency or takeover bids that are not yet available to the public, this entails a special responsibility. In this article, you will find out what insider trading means, how it works and what the legal situation is in Germany.
Insider trading definition
So-called insider trading is the Trading in securities, such as shares, on the basis of information provided by the Not accessible to the public are. An insider is therefore a person who possesses knowledge that could have a significant impact on the price of a security.
Insider trading occurs when a person has a professional relationship with a listed company. Through the professional connection insiders obtain information that is not yet public knowledge.
Insiders can therefore be represented on supervisory boards and management boards, as they often have access to special knowledge. However, any employee of a company can be an insider if they have access to the relevant knowledge. A distinction is made between primary and secondary insiders:
- Primary insiderThese are persons who are directly involved in the company. These may be members of the Management Board or employees.
- Secondary insiderThis group of people receives knowledge from a primary insider and is not directly connected to the company itself.
Information that can frequently lead to changes in the share price is, for example Insolvency applications, offers for Übernahmen, important Technological developments or significant changes in the Management Board.
Insider trading example
Trading on the stock exchange is based on close monitoring and access to sufficient information. Shareholders follow the news and incorporate this data into their speculations. Based on this knowledge, investors decide to buy or sell securities.
- This speculation enables investors to make profits or losses.
- Since no investor can see into the future and therefore cannot predict developments with absolute certainty, this is always speculation.
- However, insiders use information that is not available to others to trade in securities for their own benefit.
A concrete Example should make the process easier to understand: A listed biotechnology company is involved in evaluating the results of the final clinical phase of a new drug. This process has just been successfully completed and the results have not yet been released internally. A senior employee of this project learns that the drug performed well in the final phase of the trial and is more effective than the competition.
The senior executive knows that the successful completion of this study is a mandatory prerequisite for the drug to be approved by the regulatory authorities. He also knows that approval is usually accompanied by a sharp rise in the share price.
Even before the knowledge becomes public, the executive uses it for himself and buys some shares in the company for his own securities portfolio. He expects the shares to rise significantly. After the publication of the promising clinical study, the company's share price rises significantly. The employee acquires a considerable financial advantage as he has used unpublished price-sensitive information.
Insider Trading Germany: The legal situation
Even though the German Criminal Code does not recognize the concept of insider trading as such, it is a Criminal offense. As long as information is not accessible to the public, it is not legal to use it to profit on the capital market. The Disclosure of such information and tips to other investors who use this information for their own benefit is prohibited and may be prosecuted.
Exploiting or passing on such information is prohibited due to economic and ethical difficulties. Anyone who exploits their privileged access to information in the form of insider trading against other market participants is committing fraud against other participants.
Also the Functioning of the stock exchange is impaired, if there is a risk of market manipulation or distorted price formation. Such unfair advantages could lead to a loss of confidence in stock exchange trading.
The BaFin (Federal Financial Supervisory Authority) monitors trading. They also monitor ad hoc announcements. These are mandatory, immediate publications by listed companies of price-sensitive information. BaFin can also Follow up on information from third parties, which allows investigations to be initiated.
Insider trading and its prohibitions are set out in the WpHG, the German Securities Trading Act. Sections 12, 13, 14 and 38 (1) and 119 (2) and (3) WpHG are relevant for the criminal liability of insider trading.
- Furthermore, the legislator distinguishes between an administrative offense and a criminal offense. The former occurs when the act has been committed recklessly.
- Insider trading as a criminal offense can be Fines and prison sentences of up to 5 years be punished.
There are a number of measures that serve to prevent insider trading. In addition to active monitoring by BaFin, these include corporate measures, for example.
For example, they oblige their employees to Confidentiality and have the relevant documents signed so that information is not used or passed on. In addition, the obligation to Ad hoc announcements such a measure.
Conclusion: Insider buying shares
An insider's Connection to a company Access to specific information, which the public cannot always see. If such information can lead to significant price changes, this is referred to as insider information. If people use this knowledge for their own benefit on the capital market, this is insider trading.
Insider trading is prohibited in Germany forbidden. In addition to using the knowledge for your own benefit, passing it on to other persons who use this knowledge is also prohibited and can be prosecuted. Possible legal consequences are Fines or Prison sentences of up to five years.
Various measures are taken to prevent insider trading. These include active monitoring by BaFin, confidentiality obligations on the part of companies and mandatory ad hoc disclosures. In this way fair conditions for all market participants and the Confidence in stock exchange trading be ensured.