Insider trading is the illegal practice of buying or selling a company's securities based on material, non-public information about that company. Material means the information would likely affect the stock price if it became public. Non-public means the information is not yet available to the general investing public. Insider trading undermines fair markets and is strictly regulated by the SEC.
Sarah is a senior executive at DataCorp and learns in a private board meeting that the company will miss earnings targets and announce layoffs next week. Before this news becomes public, Sarah sells her DataCorp shares at current prices. Two days later, the company announces the bad news and the stock price drops 20 percent. Sarah's early sale based on inside information is illegal insider trading, and she could face criminal charges and civil penalties.
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