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Insider information

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Definition of Insider information

Insider Information Image 1

Insider information

Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.



Related Terms:

Asymmetric information

information that is known to some people but not to other people.


Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.


Future-Oriented Financial Information

information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. Future-oriented financial information is presented as either a forecast or a projection.


information

bits of knowledge or fact that have been carefully
chosen from a body of data and arranged in a meaningful way


Information asymmetry

A situation involving information that is known to some, but not all, participants.



Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.


Information-content effect

The rise in the stock price following the dividend signal.


Insider Information Image 2

information content of dividends

Dividend increases send good news about cash flow and earnings. Dividend cuts send bad news.


Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.


Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.


Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.


Informational efficiency

The speed and accuracy with which prices reflect new information.


Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.


Insider trading

Trading by officers, directors, major stockholders, or others who hold private inside
information allowing them to benefit from buying or selling stock.


Insiders

These are directors and senior officers of a corporation -- in effect those who have access to inside
information about a company. An insider also is someone who owns more than 10% of the voting shares of a
company.


management information system (MIS)

a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
alternative situations


Insider Information Image 3

Medical Information Bureau

This organization was established in 1902. The Medical information Bureau (M.I.B.) is a non-profit association of life insurance companies. Its purpose is to detect and deter fraud by providing warnings called, alerts, to member companies. For example, if an insurance applicant advised one insurance company of a heart attack and then applied to another insurance company omitting this history, codes, reported by the first insurance company, indicating a heart attack would alert the second insurance company to the undisclosed history. It is a rarity, however, that the alert is the only notice of a specific medical impairement as most applicants completely disclose their history.


Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).



Signaling approach

Approach to the determination of the optimal capital structure asserting that insiders in a
firm have information that the market does not have; therefore, the choice of capital structure by insiders can
signal information to outsiders and change the value of the firm. This theory is also called the asymmetric
information approach.



 

 

 

 

 

 

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