let’s say there are two companies listed in the stock market and the bigger company wants to buy the smaller company.

the bigger company does the due diligence first and decides which assets are important and how the synergies will work.

then slowly the upper management starts buying small lots of shares of the smaller company , resulting in price increases . the quantity of shares are kept small so that the average daily trading volume is not exceeded. If the daily trading volume is exceeded , it gets noticed in a lot of analyst reports

this happens over a long period of time – the price keeps increasing slowly

now the upper management slowly turn their friends , family on to this secret – and the friends / family also start buying .

this goes on for some time , until finally the deal is announced.

on that day , the price of the smaller company jumps a lot , ordinary people buy the smaller company’s share and the bigger company readily sells all their shares on the market.

the profit made by the bigger company is used to buy the smaller company – sometimes the entire profit is enough to buy the smaller company

so , effectively , the bigger company has bought the smaller company for free.

welcome to insider trading , it is illegal

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