What is defined as "insider trading"?

The definition of insider trading specifically refers to the buying or selling of a security based on material, nonpublic information. This means that an individual takes advantage of information that is not available to the general public, which can include earnings reports, product releases, or merger news that could affect a company's stock price. Engaging in insider trading is illegal because it undermines investor confidence in the fairness and integrity of the securities markets.

Material information is that which could influence an investor's decision to buy or sell securities. Nonpublic information is information that has not been released to the public and therefore gives an unfair advantage to those who have access to it. The regulatory framework surrounding insider trading, including laws enforced by the Securities and Exchange Commission (SEC), is designed to promote a level playing field for all investors.

This understanding distinguishes insider trading from other trading practices, such as trading based on public information or merely holding securities. While trading on public information is legal, insider trading is prohibited due to its potential for abuse and the ethical implications of exploiting confidential information.