What is Material Insider Information
Material insider information is material information about certain aspects of a company that has not yet been made public but that will have at least a small impact on the company's share price once released. It is illegal for holders of material insider information to use the information – however it was received – to their advantage in trading stock, or to provide the information to family members or friends so they can use it to make trades.
BREAKING DOWN Material Insider Information
Getting information that a company's expected earnings per share for a given quarter could be markedly poorer than expected, or getting information about developments in an ongoing lawsuit involving a company are both examples of material insider information.
Material Insider Information Versus Insider Trading
A common misconception is that all insider trading is illegal. Insiders are legally permitted to buy and sell shares of their company's stock. The transactions must be properly registered and filed with the Securities and Exchange Commission (SEC).
The illegal type of insider trading takes place when non-public material information for a publicly-traded company is used to provide an unfair advantage to a person or entity that is trading its stock.
For example, say a director of marketing at an automotive company overhears a meeting between the CEO and the CFO. Three days before the company releases its earnings, the CFO tells the CEO that the company did not meet its expected revenue forecasts and lost money over the past quarter. The director with the non-public information knows that their cousin owns a number of shares in the company and advises him to sell his shares right away. This is an example of insider information because the most recent financial results have not yet been released to the public.
Imagine that the cousin mentioned above then sells his shares the next day before the earnings numbers are released. Taking action on this insider information could be considered illegal insider trading since it creates an unfair advantage over other investors. If the cousin who received the tip on revenue results from the director sold shares after the numbers were released to the public instead, the trade is more likely to be legal since the company data was already widely disseminated.
Examples of Material Insider Information
There are many kinds of corporate information that can be considered material insider information. Sometimes this information can come from within the company affected, and other times it can come from third-parties such as regulatory agencies, lawmakers, credit agencies or financial institutions.
Other examples of material insider information include earnings reports and other key financial filings. Access to knowledge of upcoming corporate actions, such as initial public offerings, acquisitions, stock buybacks or splits in advance, are often considered material information that can move the price of a stock. Insider information can also apply to pending legal information such as lawsuits or rulings by agencies like the Food and Drug Administration or the National Highway Traffic Safety Administration.