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I'm trying to understand what is considered "material" information held by an executive of a company. There is company information that an executive (say insider) will know that a public investor will not be privy to, but at which point does the information become material, and at which point is the executive required to divulge the information into the public arena?

Example: A mining company sends a rock to a lab to test it for gold. The company has stated that results will be announced in 4 weeks. The company obtains results (good or bad) from the lab after one week. They are now in possession of material information until the 4 week period they stipulated.

Additionally, I assume the lab is now considered an insider and cannot act on their information for profit? But this must happen all the time or is it very tightly controlled/regulated/respected?

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Some history:

In the US, this is very tightly controlled and regulated. Although stock market securities insider trading is a relatively new crime around the world (20-30 year old), the United States is exceptional for offering the longest sentences for it, although it is still far more lucrative than and carries lower sentences than something like petty larceny. The perception of illegal insider trading has changed in the US over the years, although it is based on much older fraud statutes the regulators and the courts have only really developed modern case law against insider trading in the past 20-30 years.

The US relies on its vast network of registered broker-dealers to detect and report abnormal trading activity and the regulator (SEC) can quickly obtain emergency court orders from rent-a-judges (Administrative Law Judges) to freeze trader's assets to prevent them from withdrawing, or quickly enacting sanctions. So this reality helps deter trading on material inside information.

So for someone that needs to get an information advantage on the market, it is [simply] necessary for them to rationalize how this information could be inferred from public sources.

Similarly there is a thin line between non-public information and public information, the "lab experiment" example would be material insider information, but the fact that there will be litigation over a company's key patents may be "public" as soon as the lawyer submits the complaint to the court system.

It is also worth noting that there are A LOT of financial products trading in the capital markets, and illegal insider trading laws only applies to trading of shares of a company. So if a major holder in gold is about to liquidate all their holdings, being short gold futures is not subject to civil and criminal sanctions.

Hope this helps. The above examples should help you understand what kind of information is material inside information and what kind is not, and how it is relevant to trading decisions.

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    I found your comment on financial products as possibly being exempt from insider trading regulations interesting and possibly useful to know about. – val Jan 30 '14 at 5:57
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"Material Information" means that any information that can reasonable affect the share price of the company [upward or downward] as looked by the investors.

The idea is to provide a level playing field to all investors. Hence it forces people having material information not to trade when they have this information that is not yet disclosed.

Yes it happens all the time and laws are quite stringent. There is monitoring of share activity by regulators ... hence most of the times the companies come out with their own guidelines and top & senior management is prohibited from trading in their own company’s shares for pretty much round the year except few windows the company decides is safe.

Now it may not be possible to monitor every small material info, but any large spike of stocks after certain announcements is investigated by regulators to verify any undue gains. For ex a person who never trades suddenly buys large qty of shares and it goes up and he sells again ... etc

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