What does "insider trading" refer to?

Insider trading refers specifically to the illegal practice of trading shares based on non-public information about a company. This means that individuals in possession of confidential, material information about a company's performance or upcoming developments—information that has not been disclosed to the public—engage in buying or selling stock, which is prohibited under securities law.

The rationale behind prohibiting insider trading is to maintain a fair and equitable market. When people trade on non-public information, it undermines the integrity of the market because it gives those insiders an unfair advantage over other investors who do not have access to that information. This principle is embedded in the regulations enforced by the Securities and Exchange Commission (SEC) in the United States, which seeks to protect against fraudulent practices and promote transparency.

The other options highlight practices related to stock trading but do not capture the specific illegality associated with insider trading. Buying shares after a public announcement is a completely legal action, as it relies on information that is accessible to all investors equally. Trading based only on public information does not constitute insider trading, since all market participants have the same information available. Lastly, negotiating stock prices in private refers to different forms of trading or agreements outside of the open market, which also does not align with the definition of