Insider trading is the illegal practice of trading securities based on non-public, material information about a company.
Which of the following is considered insider trading?
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A) Trading securities based on publicly available information is not insider trading. B) Trading securities based on non-public, material information is insider trading. C) Trading securities based on a rumor from a coworker may or may not be insider trading, depending on the accuracy and source of information. D) Trading securities based on a recommendation from a financial advisor is not insider trading unless the recommendation is based on non-public, material information.
A) This is not insider trading, as the information is already public. B) This is not insider trading, as the analyst is using their own research and analysis, not material non-public information. C) This is insider trading, as the employee is using material non-public information to make a trade. D) This is not insider trading, as the information is from a public source.
In the 1980s, a prominent investment banker was convicted of insider trading after using non-public information about upcoming mergers and acquisitions to make millions of dollars in profits. The case brought widespread attention to the issue of insider trading and led to increased enforcement efforts by regulators.
Which of the following individuals can be charged with insider trading?
A) This individual can be charged with insider trading, as they are trading on material non-public information. B) This individual is not trading on the information, so they cannot be charged with insider trading. C) This individual can be charged with insider trading, as they are trading on material non-public information. D) Both A and C are correct.
An employee of a pharmaceutical company learns that the company is about to announce positive results from a clinical trial of a new drug. The employee shares this information with a friend, who buys the company's stock before the news is made public. When the news is released, the stock price increases and the friend sells the shares for a profit. Both the employee and the friend could be charged with insider trading.
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Example Series 65 Example Practice Question
- *Insider Trading*: Insider trading refers to the buying or selling of a security by someone who has access to material, non-public information about the security. This practice is illegal and unethical, as it gives an unfair advantage to the insider and undermines the integrity of the financial markets.
- *Insider Trading Scenario 1*: An executive at a publicly-traded company learns that their company is about to announce a major acquisition, which is expected to significantly increase its stock price. The executive buys company shares before the announcement, hoping to profit from the anticipated price increase. This is an example of illegal insider trading. - *Insider Trading Scenario 2*: An employee at a law firm working on a merger deal overhears a conversation about an upcoming merger between two publicly-traded companies. The employee buys shares in one of the companies before the merger is announced, hoping to profit from the anticipated price increase. This is also an example of illegal insider trading.