The law bars trading on "material nonpublic information." But prosecutors have some wiggle room to define precisely what type of tip fits that category. The most clear-cut examples involve market-moving news -- of an impending merger or a bad earnings report, for example -- before it is made public. But there are gray areas.

Insider trading is in the news again because of federal investigations of trading by Martha Stewart and others in ImClone Systems Inc. stock last December, just before the biotechnology firm announced bad news about its key cancer drug that sent its shares plunging. Ms. Stewart, chairman and chief executive of Martha Stewart Living Omnimedia Inc., has denied wrongdoing.

What follows is a primer on when acting on a stock tip can get you in trouble:

Question: What if a member of your foursome passes along this tip? "XYZ Corp.'s stock is about to go up," he says. "You may want to buy."

Answer: This is a classic market rumor, and you wouldn't get in trouble if you trade on it. The tipster hasn't given you enough information -- such as how he knows the stock is about to rise -- for it to cause a problem for you. If you know he is the chief executive of XYZ, however, you could be in trouble.

Q: What if he says he has a friend who works at XYZ Corp., who says the company has a hot new product in development and you should buy the stock?

A: It depends on precisely what was said. If your golf partner made it clear that the information isn't yet public and that it came from someone who works at the company, you could face legal problems. The employee has breached his legal duty to the company to not disclose the information, and you know -- or should know -- that. But there are gray areas. This is what is known as a "second-hand" tip, and federal regulators and prosecutors don't always pursue people who are further down the chain of information.

Q: What if the tip is that members of XYZ's founding family are dumping their shares so that you probably should unload, too?

A: It depends to a large extent on what you know about the company. If that is all you hear, you are probably fine because you have no idea why the family is selling. The sales could be part of a regular selling program or family members could be selling to raise cash to buy a house.

"This is a much weaker case," says David M. Brodsky, co-head of the securities litigation group at Latham & Watkins in New York. The mere fact that insiders are selling, even heavily, isn't necessarily "material," or market-moving information (though it may be nonpublic). But if it turns out that the sales truly are unique -- that the founders had never sold shares before, for example -- you may be courting trouble.

In the Martha Stewart case, legal experts say the domestic-products entrepreneur could face charges based on the allegation federal prosecutors made in court papers in New York this week that her Merrill Lynch & Co. broker told her members of ImClone's founding Waksal family were selling. A close friend of former ImClone CEO Samuel Waksal's, Ms. Stewart, also was a longtime ImClone shareholder who experts say would have known that the company was expecting a major decision by federal regulators about an important cancer drug. Still, experts say this would be an aggressive reading of federal securities laws and any such case could be difficult to win.

Q: Does it matter whether the tip comes from someone who works at the company or a third party in a position to know?

A: No. "The test is whether the person who gets the information has reason to believe that the information ultimately came from a tainted source," Mr. Brodsky says.

These sources could include employees of law firms, printing companies or even newspapers who have come into possession of market-moving confidential information. They often are charged with "misappropriating" that information from their employers. In court papers this week, prosecutors signaled that Ms. Stewart's broker could face such a charge for misappropriating information about the Waksal family's stock sales from Merrill.

Q: What if the tip is even more specific -- that the friend has learned that the hot new product in development at his company will be dealt a big blow from regulators, who won't let the company go forward with the product?

A: This is certainly "material nonpublic information" that someone from the company shouldn't be disclosing -- and you are likely to be prosecuted if you trade on it. Still, there is a wrinkle. Federal courts have ruled that the tipper is only breaching a duty if he gets some monetary or other benefit. Prosecutors have found it fairly easy to satisfy the requirement, however. Courts have held that it was sufficient to show that the person's reputation among his colleagues would be enhanced by having it known that he was a good tipper.

Q: Do you have any obligation to ask enough questions to figure out how the person telling you the tip obtained the information?

A: Legally, probably not. "If someone just says you should buy X and they don't work at the company and you never ask why, you're probably stupid to just listen to that" and trade on it, says Jeffrey Haas, a professor of securities law at New York Law School. "But you don't have a duty to find out where it came from."

On the other hand, regulators may be toughening up in this area. Nancy Grunberg, formerly an assistant director of enforcement at the Securities and Exchange Commission and now a partner in the Washington, D.C., office of law firm Venable LLP, says, "The SEC would want to know -- unless it was on a piece of paper that fell out of the sky -- whether you asked about the source of the information before you acted on it."

--- Are You a Tippee?

An Insider-Trading Glossary

Many phrases about insider trading became well-known during the 1980s
scandals, and are back in the news again due to the ImClone/Martha
Stewart investigation

-- Inside Information -- News that hasn't yet been publicly released
that would affect a shareholder's decision to buy or sell stock in a
publicly traded company, or "material nonpublic information."

-- Tipper -- Someone who passes on inside information that they had a
legal obligation to keep secret, but doesn't trade on it themselves.

-- Tippee -- Someone who accepts inside information from a person who
shouldn't have revealed it, and trades on it.