5 Examples of Insider Information

John Spacey, May 26, 2018

Insider information is non-public information about a company that is known to the stakeholders of a firm. Such information is potentially communicated to third parties such as friends, family or financial analysts. Most jurisdictions have laws governing material information that hasn't been disclosed to the public that prevents insiders from profiting from a significant information advantage. This is important to the perception that markets are fair. If markets are viewed as rigged, it becomes more difficult for firms to raise money. This can be damaging to the economy of a nation. The following are illustrative examples of insider information.

Board of Directors

A member of the board of directors of a firm knows that a firm plans a major divestiture that will result in significant costs and write downs.

Executive Management

An executive knows a firm plans a major investment in a new facility. The firm is unprofitable and burning cash at a high rate. As such, this news is likely to cause a drop in stock price as investors are concerned with the cash position of the company.

Employees

A line manager at a factory knows that a firm is failing to meet its production targets due to incidents that caused significant downtime to production lines. Based on this, he knows the firm can't possibly achieve its quarterly revenue target.

Partners

A manager at a supplier to a mobile device company knows that a significant design flaw has been found in a critical component for a highly anticipated new product. Based on this, she knows that the product launch will be delayed by more than a month. This is material to the stock price as this will certainly impact revenue targets and shake investor confidence in the firm.

Third Parties

An analyst with a hedge fund is good friends with an executive at a small IT company. During a night of drinking, the analyst learns that the firm is about to be acquired by a larger firm at a significant premium to the current stock price.

Notes

Insider information is not necessarily material information. For example, an insider may know about a new product feature that is known to the public. However, this information may be unlikely to influence the stock price.