Investing Strategies

Smart investing strategies use whatever information works. Stock trades by company insiders can be valuable clues to what to expect. Who knows more about what’s really going on inside a business than the people who run it? But isn’t this illegal insider trading? No, not if you do it the right way. Here’s how.

When Officers or Directors of a company buy or sell any of the company’s stock, they’re required to report the transaction to the SEC on SEC Form 4. This information is part of the public record. Anyone can see it at the SEC website. But this can take a lot of work, since it may mean reading through hundreds of company postings. Several companies make it easy for investors by compiling the data, but they can be expensive.

Yahoo!Finance comes to the rescue. Look up any company on this invaluable site. Click on “insider transactions” at the left of the page. You’ll see the complete record of insider trades for that company. And it’s free.

Now that you know what the Officers and Directors have been doing, how do you make sense of it?
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• Buying is usually more important than selling. The only reason to buy is if the price will rise. Sales might be to raise cash, diversify a portfolio, etc.
• The bigger the transaction, the more important it is. Buys or sells under $10K may be ignored.   
• The number of insiders is very important. If several insiders make similar trades at about the same time, it shows they agree about the company’s prospects. One trade might be an outlier. Several trades by several people are a judgment.
• Purchases on the open market count more than private purchases set up just for insiders.
• Officers count more than Directors. They’re closer to the business.

Here’s an example. Neenah Paper (NP) is a hot stock right now. It’s gone up 61% since November 25. But we see that on January 31, six Officers and one Director sold stock in transactions ranging from $62,610 to $1,119,186. They took about a dollar less than NP is trading for today. That’s a warning

There are many ways to see what insiders are telling investors. The easy way is by subscribing to the Safe Money Products Investment Letter.

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