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

What does the term 'material information' refer to in the context of insider trading?

1. Information that is widely known among the public

2. Any data that is used for accounting purposes

3. Non-public information that could impact a company's stock price

4. Public disclosures made in SEC filings

The correct answer is: Non-public information that could impact a company's stock price

The term 'material information' in the context of insider trading refers specifically to non-public information that has the potential to influence an investor’s decision, particularly regarding buying or selling a company's stock. This information, if disclosed, could likely affect the company's stock price because it relates directly to the company's financial performance, strategic decisions, operational changes, or other significant developments. When this type of information is confidential and not available to the general public, it creates a scenario where individuals who possess this knowledge are considered to have an unfair advantage in the securities markets. Regulations like the Securities Exchange Act prohibit insider trading to maintain fair market conditions and protect investors. Therefore, understanding that material information is specifically non-public and has the potential to affect stock prices is crucial in navigating the legal and ethical landscape of trading. The other options focus on aspects that do not align with the definition of material information. For instance, widely known information would not be considered 'material' since it does not provide an unjust advantage or affect the decision-making process of investors. Similarly, data used for accounting purposes and public disclosures made in SEC filings do not meet the criteria for being classified as material since they are either already available to the public or do not necessarily have an immediate impact on the stock price.