Insider Trading FAQ
Who are "insiders"?
The term "insider" was defined by the SEC and includes company officers (executive director, financial director, operations manager, etc.), board members and major shareholders (those who own more than 10 % of the company).
Isn't it illegal?
Insider trading evokes something illegal - something where people illegally use internal information for buying or selling shares before this information is officially made public. It has always been absolutely legal for company insiders to buy and sell shares of their company when doing so without the advantage of non-public information.
Why haven't I heard of insider trading before?
In the past, insiders had to report their transactions to the SEC one month after the transaction. This big delay caused insider trading information to be invaluable to other participants in the capital market. Within the Sarbanes-Oxley Act (2002) insiders are obliged to report their transactions within two working days by means of Form 4. This gives investors helpful data to be included into their investment strategies.
Has all insider trading any significance?
Not all insider purchases are significant. There are some purchases that you should disregard, such as purchases within the Initial Public Offering (IPO) of the company and purchases of new insiders in the company. Why? Insiders often acquire additional shares, such as during the IPO. IPO itself usually is profitable, however, the presence of insiders in it does not ensure profitability. Newly recruited insiders often do an initial buy according to the company statutes, which require that key employees hold a certain number of the company’s shares.
What does it mean when an insider sells?
While insider purchases indicate positive performance in the future, insider sales must not necessarily predict a decline. Many managers receive a great part of their bonuses in the form of options or grants. So some insider sales may be just as ordinary and normal like cashing a check. Insiders may also wish to diversify their stock portfolio or pay their expenses (a new house, etc.).