Insider trading is synonymous with the idea of greedy corporate executives serving time in white collar prison. And while that indeed is sometimes the case, there are plenty of examples of insider trading happening legally, all the time. However, the legal version of insider trading is commonly referred to as insider buying.
How to Track Insider Trading
- Visit the SEC Website
- Search by Company
- Search by Form
- Follow the News
The SEC (Securities and Exchange Commission) defines an insider as “management, officers or any beneficial owners with more than 10 percent class of a company’s security.” This means that (1) the company in question is publicly traded on a securities market, like the NYSE or NASDAQ, (2) the insider owns a sizeable portion of those securities, and (3) they are likely in a position to regularly know material information regarding the trajectory of the company, like whether it is about to merge with or acquire another company, spin off part of its operations, release a market changing new product, or crash and burn.
Managers, owners, or executives of a company are permitted to buy and sell shares of company stock, even if they know such material, market moving information. It’s no surprise that they would because it’s their company, or at least a company in which they manage and/or have a sizable share of interest in.
The only caveat is that these trades need to be performed legally. What that means for insiders is that they cannot sell shares within six months of their purchase. This prevents them from benefiting from quick swing trades based on information that hasn’t yet had the chance to go public. Insiders must also file forms with the SEC and follow certain rules, such as filing these forms within two days of their trade.
Why Track Insider Trading
Research has shown that insiders typically outperform the stock market. If you buy and sell socks or invest in stocks long term, you can benefit from insider knowledge to make financially profitable moves.
Learn How to Analyze Your Market and Trading Plan
Custom-design an options strategy to fit your market outlook. This guide goes beyond the basics to help you understand how to evaluate a strategy’s risk and reward. Start with your market outlook, then hone in on your strategy based on the risk you’re willing to take.
Download Your FREE Options Trading Strategy Guide today!
As you might guess, an insider buying more shares of company stock indicates a bullish perspective on the company—meaning, stock prices are likely to go up. An insider selling their shares indicates a bearish perspective—in other words, stock prices will likely go down.
There may be other reasons why an individual insider is buying or selling shares of company stock, so you should not view it as the only way of analyzing a company. For example, they may be selling their shares because they need money for personal reasons or because another type of investment opportunity has come up, not because they’ve lost confidence in the company. Even so, insider buying or selling is a pretty strong indicator of the company’s health.
Keep in mind that insiders are well aware of what’s going on at a company and can make guesses about what will happen, even before that information becomes reality and public knowledge. At the same time, generally speaking, they cannot buy or sell stocks based on material information that has not yet gone public, and the SEC enforces this rule by requiring insiders to file forms within two days of their trade.
This makes it hard for insiders to reap financial benefits from non-public information, out of concern for the SEC auditing their actions and discovering that these inside buyers violated their fiduciary responsibilities. If they became an informant sharing an inside tip with a third party, this is obviously a violation of company trust, and they have failed what the SEC calls the Dirks Test.
Let’s say that the executive of a company that manufacturers agricultural drones has a hunch that a major food supplier is about to open discussions of a deal. Accordingly, they decide to buy 4,000 additional shares of company stock. As long as they file the requisite forms within two days, their purchase is legal insider buying. Now imagine that the same executive knows that a deal has already closed and quickly buys 4,000 additional shares before that information goes public. That would be insider trading.
Either way, investors should pay attention to what insiders are doing. Here’s how they can do so, legally.
How to Track Insider Trading
Visit the SEC Website
One of the first places you can go to track insider buying is the website for the Securities and Exchanges Commission website. Insiders (as defined by the SEC) are required to fill out forms within two days of their trade. This includes Form DEF 14A, a proxy statement listing directors and officers, along with the number of shares owned by each.
Schedules 13D and 13G disclose any outside ownership information greater than 5 percent of the company stock. And Forms 3, 4, and 5 disclose insider ownership for stock owners who hold 10 percent voting power or more. With the exception of rare occasions, these forms are filed electronically on the SEC website and retrievable using their EDGAR system.
Search by Company
A visit to the EDGAR retrieval system (short for Electronic Data Gathering, Analysis, and Retrieval) on the SEC website will see that they can search for recent filings via a company name, fund name, ticker symbol, central index key (this is a number given by the SEC to individuals, companies, and even foreign governments), or other key pieces of information. As soon as you put this information in, the SEC will display important company filings, such as quarterly reports, annual reports, and any statement of acquisition of beneficial ownership by individuals (a statement showing someone has made a sizable purchase of company stock).
Search by Form
If you are looking for a particular form (for example, the Form DEF 14A, Schedule 13D, or Schedule 13G) you can also use EDGAR to look up that information as well.
Unfortunately, if you are searching for specific forms, EDGAR only gives you the option of going back five business days. However, for investors looking to piggyback off the stock market moves of corporate insiders (legally), this is probably a sufficient time frame. Anything beyond five days might be old news, especially when it comes to something as fast moving as today’s global economy.
Follow the News
This can be helpful, but only up to a point.
For one, the news is not going to report every single instance of insider buying. For investors hoping to piggyback off legal insider trading/insider buying, this can mean missing out on some serious opportunities. The other issue is that despite the rapid news cycle, the information is somewhat still dated.
Once consumers and institutional investors who rely on a particular news outlet see that Bloomberg or Forbes is reporting that the CEO of a company dumped all their stock or that a 10 percent owner has now purchased more shares, they will become part of the stampede trying to buy or sell that stock, only further driving up or driving down prices.
In order to really benefit from insider buying before its ripple effects, you’ve got to act faster than the news.
Check InsiderTrades.com Today
It’s important to stay up to date with the source. This means checking the SEC website frequently. However, searching EDGAR on the SEC website is not going to be helpful for most investors unless they have a background in reading corporate filings. If you don’t, it’s easier to turn to a consumer-facing venue that can translate the most recent SEC filings into easily digestible information.
InsiderTrades.com is one such venue, and you can sign up to get a daily update about insider buying. This will allow you to act accordingly, before everyone else hears about it on Bloomberg or FoxBusiness.
Another reason to use a consumer-facing venue is that the pundits involved in crafting the content may have helpful insights drawn from previous research and involvement in watching the market movements of securities. As mentioned before, it can sometimes be difficult to pinpoint the motives behind insider buying, and it doesn’t always indicate that company’s stock is a good or bad trade.
For example, EDGAR may show you that a 10 percent owner of a company is about to purchase enough stock to bump himself up to a 25 percent owner. Without knowing the whole story, you may assume this a good sign to buy, but what if this individual actually has a terrible track record in corporate ownership, and their increased involvement in a company is actually a sign you should dump it, not buy more shares? Without someone to interpret SEC findings and present them in a digestible way, tracking insider buying can remain guesswork.
Like anything else about buying and selling stocks, you need to look at the bigger picture to really benefit. InsiderTrades.com can help.
How to Avoid Illegal Insider Trading
You probably don’t want to spend time in white collar prison. This means you don’t want to run afoul of insider trading law. The good news is that as an individual investor, you more than likely don’t have to worry much about personal involvement with insider transactions or illegal insider trading convictions.
Remember, a corporate insider doesn’t just have inside information. A company insider owns a sizable portion of company stock (more than 10 percent). Due to their ownership, they have a fiduciary duty to other shareholders. They will likely have access to material, nonpublic information that can assist them in making insider buys.
For the average investor, these concerns do not apply. Even a company insider, like an average employee, would most likely not have their trading activity fall into the category of illegal insider trading activity. Most companies that issue stocks on an open market are fairly sizable operations that do not share non public information with rank and file employees.
That said, if you work at a company and think business is looking up, buy as many stocks or stock options as you want! But if you own a portion of the company or have access to insider knowledge that is also nonpublic information, your insider purchase could run afoul of insider activity. That why it’s important file the right forms with the SEC and perhaps speak to your HR department or legal counsel to avoid the risk of getting involved with securities fraud.
There is nothing illegal about copying the moves of an investor or trader who does have access to insider trading information. You just have to use it legally. Many companies have blackout periods where employees or owners cannot buy or sell stock, usually before the release of an earnings report, to help avoid the suspicion of securities fraud. Company insiders who place their trades legally must file the paperwork. This is a benefit to you as an investor, because it means you can you review and use SEC filings to benefit from legal insider trading data.
Insider Trading Isn’t Always Illegal
Insider trading, when accompanied by an insider filling out the requisite forms and following the rules outlined by the SEC, is perfectly legal. Moreover, it’s a great way for investors to get insights about market movements, sometimes even before the market moves.
Tracking legal insider trading through the SEC website or signing up to get a daily update from a InsiderTrades.com is a perfectly legal stock trading strategy, and it’s an investing tactic we encourage you to use often.