What is considered insider trading?

Insider trading refers to the act of buying or selling a publicly-traded company's stock based on material nonpublic information—information that has not been released to the public and could influence an investor's decision to buy or sell that stock. The key aspect of insider trading is that it involves confidential information that is not available to the general market, giving an unfair advantage to those who possess it.

Material nonpublic information can include upcoming earnings announcements, mergers and acquisitions, or other significant developments that have not yet been disclosed to the public. When individuals trade based on this type of information, they violate securities laws designed to maintain a level playing field in the markets.

In contrast, trading on publicly available information does not constitute insider trading because it does not leverage undisclosed information to gain an advantage in the market. Similarly, limiting the scope of trading to specific instruments, such as stock options or foreign securities, does not inherently define insider trading; it is the use of nonpublic material information that is central to the definition. Therefore, the key element in understanding insider trading is recognizing the importance of the information's availability and its impact on trading decisions.