Insider trading is the buying or selling of a security (such as a stock or a bond) based on material, non-public information about the security. This information is not yet known to the public, so the person who has it has an unfair advantage over other investors.
For example, let's say you work for a company that is about to announce a major product launch. You know that this launch will be a success, so you buy shares of the company's stock before the announcement is made. When the announcement is made, the stock price goes up, and you make a profit.
This is insider trading, and it is illegal in most countries. The reason it is illegal is because it gives you an unfair advantage over other investors. It's also unfair to the company, because it can distort the stock price and make it difficult for the company to raise capital.
If you're caught insider trading, you could face serious penalties, including fines and jail time. So it's not worth the risk.
Here are some other examples of insider trading:
A financial analyst buys shares of a company's stock after receiving a research report that predicts that the company's earnings will be much higher than expected.
A friend of a company CEO buys shares of the company's stock after the CEO tells him that he's planning to sell his shares.
A government official buys shares of a company's stock after learning that the government is about to approve a major contract with the company.
In all of these cases, the person who trades on the information has an unfair advantage over other investors. This is why insider trading is illegal.
If you're ever unsure whether something is insider trading, it's best to err on the side of caution and not trade on the information. There are a number of resources available to help you understand what constitutes insider trading, and you can always consult with an attorney if you have any questions.
Here are some additional things to keep in mind about insider trading:
The information that is used to trade must be material. This means that it must be information that could reasonably be expected to affect the price of the security.
The information must be non-public. This means that it must not be known to the public at large.
The person who trades on the information must have a duty to keep the information confidential. This duty can arise from a number of different sources, such as employment, a fiduciary relationship, or a law or regulation.
If you violate any of these three factors, you may be guilty of insider trading. So it's important to be aware of these rules and to avoid trading on any information that you know or believe to be material and non-public.
