Frequently Asked Questions

Who are insiders?

The term "insider" includes CEO's, CFO's, VP's, and other participants that have access to material information about the company and who can influence the direction of the firm. Generally, anybody or organization, including other investing firms that owns 10% or more of a company's equity is an insider and must file insider trading reports.

Isn't insider trading illegal?

Company insiders have the right to buy and sell securities in their firm so long as they are complying with securities laws and rules. This means, for example, that they cannot trade in their securities when they have non-public information, such as a pending takeover bid.

Where do IBA get insider trading reports?

Securities regulators generally require corporate insiders of publicly listed companies to report the details of all their buys and sell of company securities within 2 days of a transaction. Insider reports are filed electronically with the SEC in the US.

Insiders must report transactions done both on and off stock exchanges in any securities issued by a reporting issuer or in derivatives that result in a claim on securities issued by the company. So, the requirements cover not only stocks but also warrants, options, and other derivatives.

Why do company insiders sell?

The truth is insiders are usually net sellers. They're typically always selling their stock more than they're buying their stock and the reason why is that a lot of compensation for management teams comes in the form of their stock in their own company. So if they might want to send their kids to college, buy a new home, or they might want to diversify and take all their eggs out of one basket so they're usually net sellers of their stock.

Why do company insiders buy?

There's only one reason why an insider will buy shares in their company which is this stock is attractively priced and that it's a good business that will do well over the long term.

What is the opportunity?

When you are looking for businesses to buy a great place to start is by finding stocks that insiders themselves are purchasing, and the reason why is that you know that you're associating with a management team that owns stock, so you know that they're gonna engage in more shareholder-friendly practices, and you also know what stock what price they paid for it and, so you know that they think that their stock is attractively priced at this time.

Why do investors use insider tracking?

Academic studies using US data suggest that corporate insiders may earn above-normal profits on their trades (For example, see Lakonishok and Lee, "Are Insider Trades Informative?" The Review of Financial Studies, spring 2001). The findings suggest that company insiders, as a group, maybe better informed than the average investor about the prospects for their respective firms. Other US studies[1] have found that insider buying tends to provide better information than insider selling. Please keep in mind, however, there is no guarantee that results will be repeated in the future.

Should I short-term flip or long-term hold?

I've seen people are using inside information on a very short-term basis. So they're trying to like see a CFO bought this stock, I'm gonna like a penny stock or something I'm going to go and hop in there and buy shares and try to flip it in like a week or a month. And there is some of that out there but the businesses that I've been buying and looking into, you can kind of see the history of the insiders that they're not trying to flip it in a week, a year, a month, or whatever. It is and I think that it's always helpful to think about stocks as if it was a local company in your area so if you bought into a local business a physical business that you would go and visit and meet the people that ran the company, you would not think of selling out within a month, a year, or three years.

You probably wouldn't look at the valuation of what you initially purchased that probably for another five years and you'd probably be buying in expecting to hold the business for over 25 years maybe even your entire life. I think that sometimes with stocks we can get carried away and try to flip things super quickly or trade very often and I think that a much easier way to compound your money over the long term is to buy a stock for the long term to not sell it to not have to deal with capital gains tax and just to allow your money to compound within whatever individual stock that you're buying

If you look at what insiders do typically if they're buying shares in their company if they're large owners or their own company, they aren't selling, they're buying over the long term they're holding for a very long time. They think it's a good business and they want to hold their stock for 10, 15, 20 years.

Should I only look at large insiders' purchases?

This is kind of a controversial topic inside of tracking insider buying. Some people will say "oh you should only look at large purchases because that's the only thing that's significant", I kind of disagree because it depends on the kind of companies that you're looking at. If you're looking at very large-cap stocks like if you're looking at JP Morgan for example, and the CEO is Jamie Dimon, makes like 50 million a year so if he's buying a stock for a hundred grand, it's somewhat insignificant.

I think that if it's a larger business where the insider makes an enormous amount of money, they have a very high net worth. You want to see larger purchases but like I was saying before I bought some businesses that were small community banks where the insiders might make 200 grand a year, and they are a hundred grand a year they might be buying fifty thousand dollars worth of stock and it's not like everyone just has massive amounts of cash they're sitting around so these people are probably really invested in their homes, their kids are in school like they're they don't have a ton of liquid networks. So I think that with a smaller company if you're looking at a small-cap stock or a micro-cap stock, you know a ten thousand dollar purchase could be a significant purchase for that person so I don't think that you should ignore.

Who should be the insiders we need to pay attention to their trades?

My favorite is the CFO that's the chief financial officer and the reason why is that they're intimately connected with their financials which is especially important with certain companies. They understand the liabilities, they understand if like who they're lending to, who their customers are which is so important in major times of credit uncertainty, as today so they're also very valuation conscious because they're like kind of accountant type of people they're going to be looking at the share price, the valuation that their company is getting, and that's going to factor into the decision they're making if they want to buy or sell the stock so that is super significant.

What patterns should I look for?

I've heard some people talk about insider tracking and they'll say that they won't look at this because they'll say "well this guy doesn't know anything he's been buying the stock at 9 dollars it's dropped down to 5 dollars, he doesn't know how to time his stock". After all, a lot of people will only look at insiders that can time their stock properly. But for me, I think if you want to be a long-term shareholder in a company, this is attractive because what it's saying is that he thinks this company has been attracting the whole time, he's been buying the whole time, he owns a significant amount of stock, he probably owns a significant portion his net worth in the stock, and he's holding for the long term, he's not selling, he's not trying to flip it, so I think that this is a CEO that you could probably associate with long-term.

Where can I read more about insider trading and stock returns?

Books
Articles
  • Cohen, L., Malloy, C. and Pomorski, L. "Decoding Inside Information". (October 2010).
  • Tartaroglu, Semih. "Insider Trading During the Technology Bubble." (February 2009).
  • Lakonishok, J. and Lee, F. "Are Insider Trades Informative?" The Review of Financial Studies (spring 2001).
  • Miller, Edward M. "Investment Intelligence from Insider Trading." The Journal of Social, Political and Economic Studies (winter 1999): 477-484.

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