Question

Which of the following is a scenario demonstrating insider trading?

a) You receive a private phone call from your investment advisor on stocks that will have expected price increases and you purchase those stocks based on that advice.
b) You see the minutes of a Directors’ meeting on a pending merger in your manager’s office on his desk and tell your cousin to buy the stock.
c) While in a company meeting you saw a news report of another company’s upcoming acquisition and you buy the stock.
d) A director of a company is a family member and he informed you that the firm reported an increased profit for the last financial year and so you decided to buy the stock.

Answer 1

The insider trading scenario is when you see confidential minutes of a Directors' meeting about a merger and advise your cousin to buy the stock. Such behavior exploits non-public information for trading advantage, which is illegal.

Step-by-step explanation:

In the context of a public company where shareholders vote for a board of directors and executives manage the firm, insider trading refers to illegal transactions based on non-public information by individuals with an obligation to keep this information confidential. Insider trading can involve directors, employees, or any individuals who have exclusive access to confidential information about a company's performance.

The scenario that is demonstrating insider trading among the provided options is: b) You see the minutes of a Directors' meeting on a pending merger in your manager's office on his desk and tell your cousin to buy the stock. This is because it involves using non-public, material information obtained through privileged access, which gives an unfair advantage over other investors and is illegal.

Scenarios involving receiving tips from an investment advisor or seeing news reports do not automatically indicate insider trading unless the information is non-public and confidential. Receiving information directly from a director who shares non-public financial performance details, such as increased profits, and then trading on that information, also falls under insider trading.