INSIDER TRADING is Legal
Due to legal issues, the term Insider Trading may confuse some. Many astute investors often confuse Inside Information with Insider Trading and the term we are touching on today is completely legal, and has to do with management buying or selling their own company’s stock in a legal fashion.
HOW DOES INSIDER TRADING WORK? A company insider can legally trade his own company’s stock. There are layers of legitimate regulation that provide a safeguard to abuse. Executives, and members of the board can buy or sell stock in their own company providing they disclose the transaction and facilitate the trade within allowed time frames. The SEC is the ruling body in regards to insider trading and activity. Stock options also fall under their jurisdiction.
INSIDER TRADING Can Benefit Investors
HOW CAN INVESTORS BENEFIT? The theory behind insider trading is pretty simple. Look at it this way. Would you listen if a buddy of yours was on the BOD of a NYSE company and told you that he legally just purchased shares a week or two ago ? Of course you would. You would probably also take notice if that same insider just told you that he dumped his entire position. Just keep in mind that due to advances in technology this information is readily available if you are willing to do the leg work or perhaps pay a few dollars for a service.
DOES THE STRATEGY WORK? As you probably know, all investment strategies have both benefits and flaws, there are no guarantees in the markets. However, following insider trading might be best used to validate a position that you are already in. Let’s say that you own 1000 shares of XYZ at $10 and it’s now trading at $4. Let’s also assume that the CEO of XYZ just stepped in and purchased 750000 shares of XYZ at $4.31 in the open market. Now, that’s obviously a sign of confidence from management, but only use Insider Trading as a guide, not gospel.
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