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What Can You Learn When Insiders Are Buying or Selling Stock?

Wednesday, May 5, 2021

It is not by chance that corporate executives or family members always buy and sell stock at the appropriate time. CEOs and CFOs have the advantage of accessing company information ahead of other people. The fact that executives have a unique advantage over individual investors does not mean that other investors are left in the dark. The public can obtain data on insider trading and also use it to buy or sell company stock.

Insider trading is generally a clear signal about how an insider perceives his company. The main reason that investors buy a stock is the expectation that it will do well. If one insider is buying stock, that is usually not a landmark event, but if several insiders are doing the same, the purchases should catch your attention.

Tracking Insider Trading

The Securities and Exchange Commission (SEC) defines insiders as the beneficial owners, officers, or management who own more than 10% of a company’s security. Insiders must follow specific rules, which include filing SEC forms each time they trade shares. Furthermore, to thwart insider trading or illegally benefitting from information that is not in the public domain that their positions provide access to, insiders are not allowed to depose shares within six months of purchase. This rule bars insiders from gaining from quick swing trades enabled by their insider information.

If you want to know where to track insider trading, you can do this on the SEC website. The SEC requires public companies to report insider trading within two business days for all microcaps trading over the counter. At initial ownership, they have to file SEC Form-3, SEC Form-4 when changes occur, and SEC Form-5 for changes not earlier reported or were entitled to deferment. Form-4 filings are found on SEC’s EDGAR database, a collection of legal filings for every company listed on a U.S stock exchange. If you find the EDGAR website time-consuming, you can check financial news websites as they publish insider transactions. Some of these websites include:

  • Finviz features a searchable and accessible database of insider dealings
  • Forbes publishes a semi-daily report that highlights essential insider transactions
  • GuruFocus provides a free searchable database concerning insider filings in the U.S and another fee-based subscription option for insider dealings in the Canadian and Dutch markets
  • J3SG has real-time information on insider transactions and a searchable and vast database of institutional and insider ownership

The SEC monitors insider trading in several ways:

Market Surveillance Activities

This surveillance is one of the fundamental ways to identify insider trading. The SEC uses sophisticated tools to identify illegal insider activity, especially when important events are happening, such as critical corporate developments and earnings reports. The surveillance activity is motivated by the fact that insider trading is done to reap huge profits. Such huge trades are flagged as doubtful and may necessitate an SEC investigation.

Complaints and Tips

Insider trading can also be exposed through complaints and tips from sources such as unhappy traders or investors on a trade’s wrong side. SEC regularly receives calls from angry traders or investors who may have bought or sold stock after obtaining insider information.

Tips on How to Effectively Use Insider Data

When analyzing insider trading situations, consider the following guidelines:

  • Some insiders are more valuable than others; for example, company executives know more about a company than directors. Key executives are the CFO and CEO; those who run a company know more about where it’s headed
  • A lot of trading involving three or more insiders is a better indicator that something is going on. Do not act on the activities of one or two insiders
  • Insider information from small companies is more reliable than from big corporations. At small companies, almost all insiders know about company financials. In big corporations, the information is only available to the central management team
  • There is evidence indicating that insiders act in advance of expected news to avoid the perception that their action results from illegal insider trading. Most insider activity comes before precise company news by even two years before the ultimate disclosure of the news

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