insider trading
The illegal practice of trading a company's securities based on material, non-public information that would give an unfair advantage over other investors.
Example
“The executive was convicted of insider trading for selling his stock options days before announcing disappointing earnings.”
Memory Tip
INSIDER trading = trading on INSIDE information. Illegal, unfair, career-ending.
Why It Matters
Understanding insider trading is crucial because it affects market fairness and your investment decisions. If insiders can trade on secret information, regular investors like you face an unequal playing field where the deck is stacked against you, potentially eroding trust in financial markets and impacting your portfolio value.
Common Misconception
Many people think that any trade made by a company executive is insider trading, but the key requirement is that the information must be material and non-public. An executive simply buying or selling company stock based on publicly available information or general market conditions is not illegal insider trading.
In Practice
If a pharmaceutical company executive learns in a confidential board meeting that a drug trial failed, and then sells 10,000 shares of company stock before the announcement becomes public, that executive has committed insider trading. When the news becomes public the next day, the stock price drops 40 percent, but the executive already avoided those losses by trading on that secret information.
Etymology
INSIDER (someone with internal access) TRADING. Trading by an INSIDER using information unavailable to the public.
Common Misspellings
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Related Terms
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See Also
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