Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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What constitutes insider trading?

Buying stocks only on public information
Trading based on insider information that is not available to the public
Investing in stocks after company press releases
Trading exercised stock options exclusively

The correct answer is: Trading based on insider information that is not available to the public

Insider trading is defined as the buying or selling of a stock based on material information about a company that has not been made available to the general public. This non-public information can provide an unfair advantage to the trader, as their decisions are informed by knowledge that could significantly affect the stock's price once it becomes public. When someone engages in trading based on insider information, they can influence market dynamics and compromise the principles of transparency and fairness that underpin financial markets. This activity is illegal as it undermines investor confidence and the integrity of the markets. The ethical and legal implications of insider trading are taken seriously; regulatory bodies, such as the Securities and Exchange Commission (SEC), actively monitor and enforce laws against it. In contrast, buying stocks based solely on public information, investing after company press releases, and trading exercised stock options do not involve the misuse of non-public insider information, which is why they do not constitute insider trading.