Entity Operations Compliance Practice Exam 2026 - Free Compliance Practice Questions and Study Guide

The concept of "insider trading" is defined as buying or selling securities based on non-public, material information. This practice is illegal because it violates the principle of transparency and fairness in the financial markets. Individuals who possess privileged information about a company, such as executive officers, directors, or employees, can make trades that capitalize on information not yet available to the general public.

The essence of insider trading is that it undermines market integrity by allowing those with insider knowledge to gain an unfair advantage, potentially harming other investors who do not have access to the same information. Regulations around insider trading are stringent, and violations can result in severe penalties, including fines and imprisonment, to uphold the law and maintain investor confidence in the fairness of the market.

In contrast, options that relate to trading based on publicly available information or general risk factors do not qualify as insider trading. The focus on non-public and material information is what differentiates insider trading from other trading activities.