The only type of insider trading reported by the press is the illegal type, the type of white collar crime that is defined as a person or persons trading stocks in violation of fiduciary duties while in possession of material, non public information.
However, legal insider trading does exist in conjunction with the illegal type and is the direct result of illegal insider trading, as the SEC forces insiders to formally report transactions related to the stocks of their own companies through SEC Form 4, which is publicly available and has to be filed within two business days of the transaction. Thus, this trading pertains to insider trading using legal and publicly available information, which is perfectly legal.
The process of insider trading involves following what insiders do, whether they sell or purchase their own stocks. However, as famed former Magellan Fund money manager Peter Lynch pointed out, insiders can sell shares for numerous reasons, sometimes just to raise extra cash for personal use, but there is only one reason insiders will buy their own shares: they have good reason to believe the share price will rise for one reason or another. This is an exceptionally strong buy signal.
InsiderScore reported strong insider buying activity in the Russell 2000 and the S & P 500 during April and May of 2012, prompting the company to issue an industry buy inflection, its strongest macro signal since August 2011.
- Barry Diller: Coca Cola
- Steven Webster: Basic Energy Services
- James Cornelius: Mead Johnson Nutrition
- Reuben Mark: Cabela’s
Of course, this strategy does not guarantee that the stocks will rise in the near term; however, it is an extremely strong indicator of the confidence level insiders feel about their stocks.
There exists a variety of techniques that can be deployed in the pursuit and they are:
- Major moves by company officers generally are reported by financial reporting services such as Reuters, Dow Jones, or the New York Times.
- Watch for SEC policy speeches.
- Follow financial biggies such as Warren Bufffet when they make a move into certain sectors.
- The simplest method is go to Yahoo Finance, then go to the stock quote page, finally click on the tab at the left that says “insider transactions”.
- Subscribe to reports such as Insider Monthly that investigates relevant insider trades.
- The reason investors do not follow SEC Form 4 filings is simply due to the fact that they are too voluminous, so secform4.com purports to condense the information for investors in an easy to use search box.
However, legal insider trading should not be considered as an absolute buy signal, but rather as a pertinent signal to perform more extensive research into the companies in question, such as insider stock trading history, the type of insider, the size of the transactions, or whether there seems to be a consensus among the insiders.