Thursday, July 14, 2011
Insider trading often invokes an image of illegal activity. You know, when someone with knowledge the rest of the stock market doesn't have makes a killing.
Say you found out before anyone else in the market that a company just signed a big contract that would shoot its stock price up.
You could buy a big block of stock before any public announcement and make a bundle when the market learns the good news.
Or someone tips you off that a company is about to be hit with a big scandal. You could short the stock and make a large profit when the stock falls in price.
Regulators watch trading activity before and after big moves in a stock's price to spot any unusual activity.
Insider trading in this context is illegal - you can't profit from information that is not available to the whole market.
However, there is another type of insider trading that is legal and you can watch for clues about where stock prices are headed.
Officers and executives of publically-traded companies are called insiders, meaning they often have information before it is shared with the stock market.
The executives have some restrictions on the timing of purchases and sales of company stock, but for the most part they are free to trade.
However, unlike other investors, they must report their trades to regulators. This prevents them from trading on insider information to the detriment of other stockholders. They are also prevented from tipping off friends or others about impending news.
What can you learn from watching legal insiders trade?
According to a study, insiders give fairly reliable clues about price direction - not perfect, but right more often than wrong.
Where do you find insider-trading information?
Insider Stock Trading Information Can be Useful