Insider Trading - Can You Take Advantage Of It?
Being on the inside without the 'Smoky Room'
Who wouldnít want the opportunity to be on the inside? Itís your favorite holding; this company has been in your stock portfolio almost since day one. If you had the chance to be a fly on the wall and do a little inside trading, you would do it wouldnít you? Go to jail? Hey this isnít illegal; youíre simply going to use something available to all successful traders.
Insider trading is illegal under one circumstance. If a person with knowledge in a company acts on basic stock information before it is available to the general public, then it is illegal. Virtually every executive in every company owns stock; itís not insider trading, itís required in many companies. They can buy and sell like fools; the only difference is that the SEC considers key employees and directors as insiders and requires them to register their trades of company stock within two days or be accused of insider trading. Everything is fine in the world of the stock market, and it works to your benefit as well. Hereís how you can do a little legal insider trading.
Remember your favorite company, ABC Inc.? Of course you do. You notice that the president of ABC Inc. just sold a bunch of shares of the company, but that doesnít really tell you anything. Maybe the IRS got a hold of him, he wants to enhance his portfolio diversification or that 20-something bride of his filed for divorce. But a few days later, youíre checking the insider trades on the Internet, (perfectly legal and very public information) and you notice he sold again, as did the CFO and the Director of Engineering. Now the warning bells go off in your head and you plan to do some stock technical analysis.
Since you are a knowledgeable trader, you start doing some fundamental analysis of ABC Inc. Thatís when it jumps out at you; how did you miss the press release two weeks ago that the company was having money management problems? After a quick check on the ABC Inc. stocks, you realize just about everyone missed that announcement because the stock price is just as high as ever. You sold your share in the company and just did a little insider trading! You are going to make a ton of money and the Feds wonít be showing up at your door. Sounds like a great day to me!
Hereís what happened. The announcements were made but nobody caught them. The executives followed procedures, sold their shares and registered the trades with the SEC. The stock market information hit the streets and you found it. There was no stock volatility so the average investor didnít catch it; but youíre no average investor, youíre an insider trader!
You didnít rely on the original sale alone. You looked at the move and started running risk reward ratios. You calculated a a Price to Earnings ratio and everything looked fine. You did a Price to Cash Flow ratio and there it was the company was bleeding money. You make the sale and two weeks later, the quarterly report comes out and down goes the stock. You just made good money and since you are still bullish on the company, you take some of your earlier profits and buy this hot stock at a much lower price! Thatís how you can take advantage of a little insider trading.
Remember, executives selling stock isnít necessarily some great insider trading tip. But when you couple that information with some of your technical analysis tools, you are definitely operating some impressive insider tradingÖand you even skipped the smoky room too!