What does insider trading refer to?

Insider trading refers to the practice of buying or selling stocks based on non-public, material information about the company. This means that an individual has access to essential information that has not been disclosed to the general public, which can give them an unfair advantage in the market. For example, if a company employee learns that their company is about to announce a major merger or financial setback before this information is publicly available, and they trade the company’s stock based on this knowledge, that constitutes insider trading.

The legality of insider trading is a significant issue in financial markets because it undermines investor trust and the principle of a level playing field. Regulators have established strict rules and penalties to prevent insider trading and maintain market integrity. Therefore, understanding the nature of non-public, material information is essential for recognizing what constitutes insider trading.