Legal Definitions - insider information

Insider information refers to significant, non-public facts about a company or its securities that, if made public, would likely influence the price of the company's stock or other financial instruments. Individuals who possess such information due to their special relationship with the company (e.g., executives, directors, employees, or even those who receive it from them) are legally prohibited from using it to trade securities for personal profit. Doing so is known as illegal insider trading, as it creates an unfair advantage over other investors.

Here are some examples illustrating insider information:

• Imagine a senior executive at a technology company learns, before any public announcement, that their company is about to sign a massive, highly profitable contract with a major government agency. This contract is expected to significantly boost the company's revenue and stock price. This knowledge constitutes insider information because it is material (price-sensitive) and not yet available to the general investing public. If the executive were to buy a large number of shares in their company based on this knowledge before the contract is announced, they would be engaging in illegal insider trading.

• Consider a financial analyst working for an investment bank who is advising a client on a potential hostile takeover of another company. Through their work, the analyst becomes aware of the exact date the takeover bid will be publicly announced and the premium price per share the acquiring company plans to offer. This specific knowledge about the timing and price of the takeover is insider information. If the analyst were to secretly purchase shares of the target company before the public announcement, anticipating a price jump, they would be misusing this confidential information.

• Suppose a research scientist at a biotechnology firm discovers that a critical clinical trial for a new drug has unexpectedly failed, meaning the drug will not be approved for market. This information is highly material and not yet disclosed to the public. The scientist shares this news with a close friend, who then immediately sells all their shares in the biotechnology firm to avoid substantial losses before the company publicly announces the trial's failure. In this scenario, the information about the failed trial is insider information, and both the scientist (for sharing it) and the friend (for trading on it) could be liable for illegal insider trading.