The Smart Money(Insider Trading is not always illegal)
"Insider Trading" can be defined as the buying and selling of a company's stock by its officers, directors, major stockholders or other people with close ties to the company. These people may legally buy or sell stock of the company they are working for. The reasons for these insider transactions can be numerous and are not automatically considered illegal.
Insiders very often receive their stock through stock option plans and other low-cost devices and they tend on balance to be net sellers most of the time. This is a legal and normal state of affairs.
So do not cry "Foul!" the next time you discover that a corporate insider has sold 500,000 shares of his holdings. The proceeds from this insider transaction may be part of his regular compensation package.
Rather, say "Thank You!" when you discover that this very same person, instead of selling his stock before Christmas, like all the other years before, is buying an additional 2,000,000 shares for hard dollars on the Exchanges. This might be a reason to grow excited and have a closer look at the company. It could be just another case of insiders sweeping up assets for pennies on the dollar - openly and right under the noses of public investors.
Insiders are more often than not "Value Players". They simply have more detailed and accurate information than any financial report can provide. When they see what appears to them as an undervalued situation, they act on it before others see the value.
Insiders recognize low-risk value when they see it. Since they are traditionally net sellers, it is an event that certainly deserves further scrutiny when they turn around and buy at the market price and not at artificial discounts.
Insiders favor the less efficient corners of the market, the less analyzed, and the less well known companies where values are easily overlooked.
Insiders generally buy under any of the following conditions:
A development is about to improve the company's fortune.
The stock price has fallen so far below intrinsic values that the shares seem irresistibly cheap.
Stock Buying is part of a regular investment program
As an outsider you can make money from any of these situations!
Of course, there is no foolproof method for how you should follow the smart money, since insiders are more or less astute investors. They may be overly optimistic about the company's future or they may have underestimated the competition, who might then come into the market launching a cut-throat price war.
The reasons for insider trading are manifold and not all of them are reason enough for you to follow the insiders blindly. They may lead you into a minefield out of which only they know the exit.
Following insiders is much easier today than it was 25 years ago. Under SEC rules, insiders must report detailed information on their trades within certain time limits. This data is made available to the public on a regular basis. You can apply various sources to monitor the investment moves of corporate officers and other top professionals.
Suggested Links for Additional Information on Insider Trading