DEFINITION of Whisper Stock
Whisper stock is shares in a company that is rumored to be the target of a takeover offer. The reason for the whisper is that any such talk must be kept quiet for one of two reasons. One, if the rumor has some validity, those who believe it will want to act on it before the rumor spreads. Two, if the whispering actually turns out to be true due to a leak of a confidential mergers and acquisition (M&A) transaction, no one wants to be brought in for questioning by the enforcement unit of a regulator or an investigator from the Department of Justice. There may be a surge in trading volume and upward price pressure on shares of a whisper stock. Once that happens and gains wider notice by the market, the stock will no longer be a whisper stock.
BREAKING DOWN Whisper Stock
In the glory days of flagrant insider trading, little care was taken to bring down the volume on takeover talk. An old pal from the club who worked on Wall Street as a banker or as an attorney on a deal would run his mouth among his friends about an imminent deal announcement. They would then pass along the material non-public information to their buddies and family members and trade on the insider tip. As the Securities and Exchange Commission (SEC) tightened its rules and cracked down on insider trading, anyone with information, real or specious, had to become more discreet about how he passed along hearsay about a possible corporate takeover. A whisper stock could come to life in an innocuous manner; for instance, a fund manager at a conference may see the CEOs of two companies having a private lunch and then speculate that they are talking about a merger. This fund manager then could tell others what he witnessed. In many cases, though, a leak of insider information can trigger whispering of a stock, which could quickly spread in the market, impacting the share price of the whisper stock.
Resources to go after those who trade on insider information are generally insufficient, but when someone is caught, he has hell to pay.