Tipping is the act of providing material non-public information about a publicly-traded company to a person who is not authorized to have the information. This is an illegal act. Information is considered non-public until it has been publicly released and the financial markets have had sufficient time to digest the impact the information may have had on prices.
Investment bankers are often in possession of material non-public information that can be used for tipping, although occurrences of tipping are very rare. In the event that a person unknowingly passes on a tip, he or she may still have performed a criminal act by being careless with the information.
Tip can be used to make insider trades before the information becomes available to the public. The law prohibits tippees, or those who receive material non-public information, from making financial transactions based on the information they have received.
MATERIAL INSIDER INFORMATION:
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.
Insider Information is knowledge about a publicly traded company that could be used to an investor’s advantage. Knowing about a company’s significant, confidential corporate developments, such as the release of a new product, could provide an unfair advantage if the information is not public, that is, if only a few people know about the developments.
The idea that insiders have information not available to the market. Moves made by insiders can signal information to outsiders and change the stock price. The thinking goes that if a high-level executive, such as a CEO, is selling, he or she is probably doing so for a reason that you, as the public don’t know yet, so you should get out also. The same is true for the opposite. If an insider is buying stocks in his or her company, it signals outsiders to also buy based on the idea that the insiders knows more than he or she is letting on to the public.