What best defines insider trading?

• A. An unethical activity where insiders use private company information to further their fortunes or those of their family and friends.
• B. Legal trading on public information.
• C. Trading with no information.
• D. Short selling.

Answer: (A)

Insider trading is trading securities based on material information that is not available to the public, giving someone with that information an unfair advantage. The best description is that insiders use private company information to boost their own wealth or that of family and friends, which is unethical and often illegal because it undermines fairness in the market. This goes beyond simply trading on information that is already public, which is allowed, and it’s not about trading with no information or a specific tactic like short selling. For example, if a company executive learns about a positive earnings surprise before it’s announced and buys stock for themselves or tips a relative to buy, that would be insider trading.