Billionaires go to jail for it. Money managers have fled the
country and faked suicides when it's suggested. Hedge funds have
paid billions in fines and been harassed by the Securities and
Exchange Commission (SEC) on little more than a hint of its
Celebrity investor and high-tech titan Mark Cuban
recently fought and secured a courtroom victory after being
accused of violating insider trading laws.
Most recently, celebrity investor and high-tech titan Mark
Cuban fought and secured a courtroom victory when accused of
violating this regulation. Famed entrepreneur and TV personality
Martha Stewart wasn't as fortunate as Cuban -- she spent time
behind bars in 2004 for what amounted to be a relatively small
amount of money.
The strangest thing is, this action is considered a legitimate
edge in the commodity markets. It's only in the stock market
where it's considered a mortal sin.
If you haven't guessed, I am talking about insider
Insider trading offers an unfair advantage to those with the
information and capacity to profit from it. It is the desire to
level the playing field that motivates the authorities to clamp
down on insider trading. It truly is the most powerful edge
available in the stock market, hence its illegal status.
While non-public insider trading is illegal, there is a way to
capture some of this edge for yourself without worrying about SEC
wiretaps and a guilty conscience.
Company insiders are required by law to make their stock
transactions public. This information is readily available
online. There are several websites that compile this information,
but my favorite (and one of the most widely used) is
To find this information, first plug in the stock symbol on
the Yahoo Finance's ticker lookup field. When the company's
information page has loaded, find the "Ownership" section near
the bottom of the blue rail on the left side of the page. Here
you will find the major holders, insider transactions and the
insider roster. The insider transaction section will show
insiders who are selling and/or buying shares. Look for a
substantial tilt on the buy or sell side by insiders to gain an
Remember, insiders can sell shares for any reason. However,
large relative amounts, a sudden shift from a being a consistent
buyer to a seller or vice versa, or a preponderance of
buyers/sellers can signal something is going on that has not yet
made the news.
In my experience, insider purchases are more telling than
insider sales. In general, one only purchases with the desire to
make a profit. Selling can be a signal of bad news around the
corner or it can simply be a monetary need of the seller. It's
not possible to tell the difference on an individual basis.
It is this insider information that can tip off investors to
pending trouble or bullish stock news. For those interested in
more detailed information on insider activity,
is the website I find most helpful, and
has a very thorough section on current insider transactions.
The following are three stocks that appear to be sending
signals of insider activity.
|1. Home Depot (NYSE:
Director Mark Vadon recently purchased 10,000
shares for $752,000. This is on top of a 5,000-share
purchase last December for $318,500. He paid $63.70 per
share last December compared with $75.20 in September. I
see this as a serious vote of bullish confidence.
|2. Illinois Tool Works (NYSE:
Chief Financial Officer Michael Larson doubled his holdings
of ITW with his September purchase of 7,000
shares at $74.25. After the transaction, Illinois Tool
Works missed third-quarter earnings estimates. Shares
dipped, but then took off again on the upside to a recent
$78. The company is spinning off its industrial packaging
division, which should continue to have a bullish effect,
in addition to a share buyback plan that could push shares
Synageva BioPharma (Nasdaq:
Chairman Felix Baker recently purchased more than 1 million
shares at $56.63 apiece. He currently holds 7.8 million
shares of GEVA. Synageva has a substantial
pipeline of treatments for rare diseases, with a treatment
for lysosomal acid lipase (LAL)
deficiency being the lead candidate.
Risks to Consider:
Insider activity is not necessarily a sign of pending price
changes in a stock. It should be considered another tool in your
investment toolbox, not the end-all for decision making. Always
use stop-loss orders, diversification and position size properly
regardless of insider activity.
Action to Take -->
Be aware the insider activity on every stock in your portfolio
and start this discipline on every new stock you consider buying.
Insider activity can signal substantial pending price changes and
help you figure out which holdings to keep a closer eye on.
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