What constitutes 'insider trading'?

Insider trading is defined as the illegal buying or selling of securities based on nonpublic, material information about a company. This activity is prohibited because it undermines investor confidence and the integrity of the securities markets. When an individual with access to confidential information, such as corporate executives or employees, trades on that information before it is made public, it creates an uneven playing field for other investors who do not have access to that information.

The characteristics of this definition include "nonpublic" information, meaning that it hasn’t been disseminated to the general public, and "material" information, which refers to any information that could affect a company’s stock price or other securities if it were released. For instance, if a company is about to report significantly better-than-expected earnings, that information is material and, if not made public, any trading activity based on it would constitute insider trading.

In contrast, the other options describe activities that do not fall under the definition of insider trading, such as engaging in trades based solely on public information or practices surrounding mutual fund trading, which typically involve regulations and oversight to prevent conflicts of interest. Understanding this distinction is crucial for recognizing legal versus illegal trading practices in the securities industry.