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Insider trading is the activity of purchasing or selling securities based on significant nonpublic knowledge that a person has learned due to their position within a company. Since it gives people with access to nonpublic information an unfair advantage and can cause financial losses for those without, insider trading is generally banned.
Several types of insider trading are possible. It might, for instance, involve a corporate executive selling stock in their own business just before it reveals unreleased, unfavorable financial results. As an alternative, it might entail a business executive buying stock in a separate firm on the basis of insider knowledge of a forthcoming merger or acquisition that hasn't yet been disclosed to the general public.
In many nations, including the United States, insider trading is prohibited by securities laws and regulations. Insider trading can result in hefty fines, lengthy prison terms, as well as other legal repercussions. As a result of insider trading, businesses may also suffer financial losses and reputational harm.
It is important to remember that not all trade based on secret knowledge is prohibited. Corporate insiders, for instance, might be allowed to trade shares of their own company in specific situations, like within a pre-approved trading window. Furthermore, if traders have gotten nonpublic information legally, such as through market research or communicating with clients or suppliers, they may be allowed to trade based on it. Trading on nonpublic information, however, is prohibited and considered insider trading when it has been gained unlawfully, such as by hacking or theft.
