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DEFINITION:
Insider trading occurs when someone buys or sells shares in a company on the basis of non-public information that materially influences his trading decision.
Understanding insider trading
Insider trading occurs when someone uses inside information to gain an advantage over the rest of the market. It is the use of non-public information about a publicly traded company, usually for financial gain. Typically, a stock is bought before good news is released or sold before bad news is released. Insider trading is monitored by the Securities and Exchange Commission (SEC). Insider trading is illegal because it is considered unfair and undermines public confidence in the securities market.
Takeaway
Insider trading is like seeing the test a day before taking it…
While all other students have to learn all the material, you know exactly what you need to know and what areas you should focus on. This advantage will put you in a much better position than your fellow students. It would not be surprising if you ended up with the highest grade in the class. But your classmates would probably complain if they knew about your unfair advantage. This undermines the integrity of the exam, just as insider trading undermines the perceived fairness and integrity of the securities market.