Insider Trading & Market Manipulation

Introduction

Two abuses undermine fair markets: insider trading and market manipulation. Both are illegal because they let some traders profit at everyone else's expense. This lesson explains them.

Insider Trading

Insider trading means trading while in possession of material, non-public information — information that could move the stock price and isn't available to the public yet.

Examples:

• A board member trades on knowledge of a secret takeover
• An employee buys shares before an unreleased earnings report
• Someone tips a friend with confidential information

Why It's Illegal

Insider trading gives an unfair advantage and erodes trust. If insiders can always front-run the news, ordinary investors can't compete fairly — so markets punish it heavily.

Market Manipulation

Market manipulation means artificially moving a price or volume to deceive others. Common schemes:

• Pump-and-dump — hyping a stock to inflate it, then selling at the peak
• Spoofing — placing fake orders to create false demand/supply, then cancelling
• Spreading false news — posting fake stories to move a price

Consequences

Market abuse carries serious penalties:

• Large fines
• Trading bans
• Criminal prosecution in serious cases
• Reputation damage

How to Stay Compliant

As an investor, follow the rules:

• Never trade on confidential information
• Avoid acting on tips about non-public news
• Never spread false information to move a price
• Report suspicious activity if you encounter it

Real-World Example

A trader spreads a rumour online that a small company is about to be acquired, driving the price up. Once it rises, they sell their pre-bought shares — a classic pump-and-dump. The regulator detects the pattern and acts.

Summary

• Insider trading = trading on material, non-public information
• Manipulation = artificially moving prices/volume (pump-and-dump, spoofing, fake news)
• Both are illegal because they create unfair, rigged markets
• Penalties include fines, bans, and prosecution
• Always trade only on public information and honest actions

Next Lesson

How transparency rules — disclosure and listing standards — keep prices fair.