It is not a coincidence that corporate executives seem to always know when to buy or sell shares at right times. The owners or key executives such as CEOs and CFOs have access to every bit of the company information unlike retail traders and investors, who get to know the things through the company’s announcement and press. Insider trading is a wide concept that could help you to determine the opportunities to earn profit.
Insider trading: What it means to Share trader
What Is Insider Trading?
Insider trading is the trading of a public company‘s stock or other securities (such as bonds or stock options) by individuals with access to the non-public information on the company. In various countries, insider trading based on inside information is illegal as it is seen as unfair to the other investors, who do not have access to such information.
Basically, there are two types of insider trading: legal and illegal.
Illegal insider trading refers to the process of buying and selling of a security by insiders like CFOs and CEOs of the company, who possess material that is not public. The act of using the inside information to gain maximum from it is a kind of breach of their fiduciary duty.
Insider trading is said to be legal if the material information has been made public, at which time the insider has no direct advantage over other investors. To make insider trading legal the SEC, however, requires all insiders to reports all their transactions.
Who are Insiders?
The common misconception we had is that the top management can only access vital decision and information of the company, and can be convicted of insider trading, but exactly every person who has a material and non-public information can commit such an act. This implies that nearly anybody – be it brokers, family, friends and employees – can be considered an insider.
The following are the examples of the illegal insider trading:
- The CEO of a company sells his/her entire holding if came to know the company will be losing a big government contract next month.
- CEO’s relative sells the company’s stock after hearing that the company is going to lose a contract.
- A government official discovers that the company will lose a big government contract, so the official sells the stock.
Benefits of Insider Trading To Retail Investor
Insider trading is done by the company officials that have access to internal information on the company. The officials’ of the company have info of new products, company sales and other information. Following are the ways through which retail investors can benefit from the insider trading (legal):
- Long the stock at the time of Insider Buying
Insider buying every time helps the investors to realize the management is pretty bullish, and the owners of the companies seek an upside movement in the stock because of any forthcoming good news for the company. Insider buying is rare to see, but if it is done then it is a sure shot call. Investors should look for the opportunities in large companies as small cap companies could come up with some manipulation to trap investors.
- Short stock at the time of Insider Selling
Insider selling is a common practice in the market. If the shares are little overvalued or the company is coming up with some bad news then the executives generally short their position. Again doing the same in the small cap companies should be prevented as there could be a trap to manipulate shares.
Also, sometimes executives can sell their shares to take advantage of the current price that the stock is trading at. So, in insider selling, investors can never be sure of the motive behind the sell.
- Buying at the Dips
Insider trading also takes place to reposition the shares to its reasonable value. Generally, insider selling is a common practice to make the shares cheap and then buy again the same stock at a lower rate. These common strategies can be followed and should be evaluated to understand the movement in the share prices.
Also Read: Carry Trade: What is the return on your Investment?
Example of Insider Trading
Shares of Christopher & Banks Co. dropped 5.7% on Tuesday 9 Sep following the insider selling activity. Specifically, if we talk about the stock, Director Anne L. Jones sold 40,000 shares of the company’s stock in a transaction that occurred on Friday, September 5th. The shares were sold at an average price of $10.67, for a total transaction of $426,800.00. The transaction was disclosed in a document filed with the SEC.
Sometimes, stock of the company is overvalued or undervalued. Knowing such a thing is very important before entering in the stock. Insider trading reflects the status of the stock. Making a right position either long or short in the stock is very essential to know to prevent heavy losses. Insider trading just gives a glimpse of the stock current status.
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