Insider trading is a term used to describe the buying or selling of securities by people who have access to inside information. This information could be about the company's financial performance, new products, or mergers and acquisitions.

This data can be a valuable tool for investors. By studying past insider trading activity, you can know which stocks might be worth investing in. You can also see which shares might be headed for a price decline.

The data on insider trading comes from the Securities and Exchange Commission (SEC). The SEC keeps track of all transactions that involve insiders, including directors, officers, and shareholders with more than 10% of the company's stock.

So, what exactly is insider trading? Let's take a closer look.

If you're interested in insider trading, you should know a few things. You will find many articles on the internet that will describe why using insider data is illegal. On the contrary, we would like to talk about the cases in which it is legal.

In some cases, insiders may have legally obtained information through their job or position. Furthermore, even if an insider's information is nonpublic, they may not necessarily be violating the law if they trade on that information. To break the law, the Insider must have received the information in breach of a duty they owe to the company or its shareholders. In other words, trading on insider information is legal if it conforms to the rules set forth by the SEC.

However, such information can be challenging to predict. Just because there has been a lot of activity in a particular stock doesn't mean it will go up or down.

Before making any investment decisions do not forget to consult with a financial advisor to get professional advice and make your own research.

If you're looking for stocks with legal insider trading activity, there are a few places you can find data:

  • The SEC's website has a searchable database of insider transactions;
  • You can also find data on insider trading from financial news websites;
  • Also, such information is provided by stock market research and analyzing services.

On StockInvest.us, every ticker has a tag "Insider Trading" on top of the page. By clicking this, you can see all the latest insider trades and how our system evaluates the importance by assigning a score/Insider Power.

Example for Walt Disney Company (DIS), March 2022

Why is using insider information handy for investors?

To find an answer, let's remember Peter Lynch's (one of the most successful investors in the world) famous quote that "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." People related to the company usually buy the stock when they feel the company will perform well over the long term.

Author of the book "Investment Intelligence from Insider Trading" Nejat Seyhun wrote: "When executives bought shares in their own companies, the stock tended to outperform the total market. Conversely, when they sold shares, the stock underperformed the market."

Here is how you can use this data for yourself:

  • It is vital to analyze who buys or sells and how much. It is worth focusing on trades made by high-ranking employees. Most often, these people have a complete picture of the activities and plans of the company. It can be an owner, COO, CFO, CEO of the company. Such people are often also highly skilled in business;
  • Focus on significant trades. The number itself can be very relative. Someone can invest a large amount - $ 50 000 and not affect the situation in any way, because before another insider bought shares for a million dollars. Therefore, always compare the size of the transaction with the past transactions of a particular insider. And/or transactions of other insiders in the company. After that, evaluate the impact of this trade on the size of the Insider's holding. Has it increased or decreased the size of their holding significantly? If the answer is positive, that trade should be viewed as a high-conviction trade.
  • Do not forget about medium or even small companies. Companies with medium or small capitalization attract less attention, thus generating unexpected profits and opportunities.

Keep in mind that large companies can have dozens or even hundreds of insiders, meaning that trying to spot a pattern can be tricky.

Therefore, do not rely only on these numbers without analyzing the company. At the same time, try to be aware of what the insiders are doing. They probably know more than the rest of us.

Knowing the complexity of understanding the impact and interpretation of insider trading, StockInvest.us has tried to simplify this by creating an overall Insider Power Rank. It uses both: the size and the time aspect when assigning the final evaluation. As was stated above, insider trading is not definitive but usually a good indicator and should be a part of your evaluation process as you try to assess the future of the stock you want to invest into.

Thanks for reading! We hope this article will help to improve your strategy.