Investment Management Certificate Practice Exam 2026 – Complete Prep Guide

Insider trading refers specifically to the act of buying or selling a security based on nonpublic, material information. This means that an individual with access to confidential information about a company's performance or future prospects uses that information to inform their trading decisions, potentially leading to financial gain. This practice is illegal because it undermines the integrity of the financial markets, as it creates an uneven playing field where some investors have access to critical information that others do not.

When someone engages in insider trading, they are essentially taking advantage of their insider status, which violates regulations meant to maintain fair trading practices and protect investors. The information considered "material" is information that could affect an investor's decision to buy or sell a security.

In contrast, the other options describe activities that are either legal or unrelated to the concept of insider trading. Public information is available to all investors and does not give any unfair advantage. Trading by brokers on behalf of clients reflects normal market operations, and purchasing securities during market hours is simply a standard aspect of trading without any implications regarding the legality of the transactions involved.