"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.
Only the trading of securities on confidential,
non-public information is 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.
Cales Investments, Inc. can show you how!