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lunes, 2 de mayo de 2016

Make Money with Insider Information

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The use of privileged information only appears in the news when someone ends up in jail. Thus, it may seem strange to suggest the possibility to try to make money through insider trading.

However, here it is a shocking truth - the insider is not illegal. It is perfectly fine for a key executive to make trades based on what he knows about what is happening in their company - whether good or bad. What is illegal is not reporting the trade made - the Securities and Exchange Commission (SEC) requires that privileged traders with non-public information report any transaction in shares of the company within a period of two days after the trade.

Insider information is available to the public

This means that all kinds of inside information is in the public domain. Look for a ticker symbol in any major financial site, and you will see a list of all transactions that the privileged traders (insiders) have made and subsequently reported. This information is useful - information that other traders or investor who are not aware of the internal information of the company can leverage in their trading activities. Why? Because when a trader with insider information makes an operation, there is often a good reason behind this transaction.

Why the privileged traders sell?

The fact that a trader with insider information sells does not necessarily mean that the company is in trouble. For example, an executive could be compensated in part through shares, and he is simply converting his shares in cash. Moreover, like the rest of us, these people can have unexpected expenses or may want to make other investments to create a more diversified portfolio.

So when an insider sells, this is not necessarily a statement about the value of the company. However, when several insiders sold within a short period of time, the fundamentals of the company may well be suspect.

What happens when an insider trader buy?

If a trader with insider information buy it is a much clearer case. The corporate executives are like the rest of us - they buy shares because they think they will make money with the trade. This does not mean that the stock price is going to skyrocket overnight - in fact, insiders usually buy well in advance before any movement of an stock to avoid any suggestion of insider trading. In fact, the best signal is when an insider trader makes several purchases - this indicates full confidence in the future development of the company and the rise in its shares.

What can we learn from this?

It can be very useful to keep an eye on insider traders, as they may give an indication of future prospects of the company. However, it is important to remember that insider traders buy and sell for different reasons, so the overall picture of insider trading is more important than any individual privileged trade. Finally, insider trading is only part of the overall picture - is only one of several factors used in the evaluation of stocks.




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