Insider Trading
Insider trading is buying or selling securities based on material, non-public information. It's illegal and heavily prosecuted by securities regulators. Legal insider trading (executives buying their own stock) must be disclosed publicly through regulatory filings.
Understanding the Concept
• Material information: would reasonably affect investment decisions • Non-public: not available to general investing public • Includes tipping others with inside information • Penalties include fines, imprisonment, and disgorgement of profits
Real-World Example
A pharmaceutical executive learns their drug trial failed before the announcement. They sell all their shares at $100. The next day, the company announces the failure and shares crash to $40. The SEC investigates the suspicious timing, builds a case, and the executive faces criminal charges and civil penalties.
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