What is meant by insider trading?

Insider trading refers specifically to the illegal practice of trading stocks based on non-public, material information about a company. This means that if an individual, typically an insider—such as an executive or an employee—trades shares based on information that is not available to the general public and could influence an investor's decision to buy or sell, it constitutes insider trading.

This practice is considered unethical and is illegal because it undermines investor confidence in the fairness and integrity of the securities markets. Regulations, such as the Securities Exchange Act of 1934, have been put in place to prevent insider trading by penalizing individuals who engage in this kind of trading.

Additionally, trading based on public information, personal financial advice, or government bonds by elected officials does not fall under the legal definition of insider trading, as these scenarios do not involve the illicit use of material, non-public information pertinent to a company’s stock price.