What constitutes insider trading?

Insider trading is defined as the illegal buying or selling of stock based on non-public, material information. This occurs when individuals who have access to significant confidential information about a company, such as financial performance results, upcoming product launches, or mergers, execute trades based on that information before it becomes public. The key aspects of this definition are "illegal," "non-public," and "material," as engaging in such trading undermines the fairness and integrity of the securities markets.

Material information refers to information that could influence an investor's decision to buy or sell the stock. Thus, trading on this information gives the insider an unfair advantage over other investors who do not have access to this information. The prohibition of insider trading is crucial in maintaining investor confidence and a level playing field in the markets. This distinguishes insider trading from legal trading practices where all investors have equal access to the necessary information for decision-making.