Which statement best defines insider trading?

• A. Trading on public information with no relation to the company.
• B. Trading based on material non-public information; a form of securities fraud.
• C. Occurs only when misusing company funds.
• D. A practice that is legal in all jurisdictions.

Answer: (B)

Insider trading comes from using information that isn’t public and that a reasonable investor would consider important when deciding to buy or sell securities. When someone acts on that material non-public information, or shares it with others who trade on it, it’s treated as a form of securities fraud in many jurisdictions. That combination of information that could move a stock and information that hasn’t been released publicly is what makes the act illegal or improper.

Trading on information that’s already public isn’t insider trading because everyone has access to the same data, so there’s no breach of fiduciary duty or misuse of confidential information. Insider trading also isn’t about misusing company funds; it’s about the information used to trade. And while laws vary, insider trading isn’t legal in all places—it’s generally prohibited in most major jurisdictions, with enforcement to deter unfair advantages.