Insider Trading for Beginners How to Profit Legally

If you’re a beginner looking to start investing, you’re wondering where to start. Insider trading is different from most other investments because you’re not buying stocks to profit from their increase in value. Instead, you’re buying stocks for the information you can get from them. That’s why it’s essential to learn the basics of insider trading before you start.

What Is Insider Trading?

This is the buying and selling of securities based on information not available to the public. Insider trading occurs when a stock trader uses nonpublic information specific to a company or a stock that has not been readily available to everyone.

The use of this nonpublic information is thought by some to give traders an unfair advantage over those not privy to the same information. In some cases, insider trading is a treasonous crime (perpetrated) by those in corporate America against those who work for them, especially since they must sign a contract stating they will not buy or sell any of their company’s stocks. At the same time, they are privy to confidential information that has not been made publicly available.

Can insider trading be ethical?

Yes. Insider trading is not inherently illegal; it’s the unethical use of nonpublic information that gets you put in handcuffs. Most insider trading is legal and completely ethical, although I would never advise conducting any kind of insider trading for profit (without you knowing, I mean). If you just found out that a company is about to release great news that will boost its stock value, why would you keep this information from your friend who asked you for investment advice? Acting in a hurry isn’t the best way to earn more money. There’s always collateral damage, and as one truly successful investor once said, ‘Buy low, sell high!’

The law recognizes three types of insiders:

Company officers, directors, and registered employees have access to confidential corporate information because they work for the company. Typically, these are people in positions with significant control over their activities, such as their CEO or CFO. They may also include directors and other high-level employees who do not have control over day-to-day operations but still have access to critical financial data about their company.

Under Section 16(b) of the Exchange Act, which sets rules for when insiders must file reports about their trades with the SEC, these individuals are required to report their purchases and sales within two business days after they occur. Section 16(b) often imposes fines and penalties against companies and individual executives.

Benefits of Insider Trading

Many investors don’t realize that insider trading is illegal and can be very beneficial. Inside information can be used to make money in the stock market. Here are some of the benefits of insider trading:

Faster execution times

Insider traders can benefit from faster execution times to get their orders filled before non-insiders. This is typically because they’re working at the same company as the insider leaking confidential information. The insider will have an inside track on upcoming news or events that could affect the security’s price, so they may be able to place their order before anyone else knows about it and get it filled in before the news gets out publicly.

Lower costs

The other benefit of insider trading is that it can help you reduce your trading costs by allowing you to avoid paying commissions when placing your trades. Many brokers charge a flat fee for each transaction regardless of its size, so if you’re trying to make multiple trades every day, this can add up quickly over time and eat away at your profits. In addition, some brokers also charge additional fees for placing orders during certain hours of the day or on special holidays like Christmas Eve or New Year’s.

Access to information others don’t have

Insider trading can provide an unfair advantage over other investors by allowing insiders to take advantage of market-moving news before it’s known publicly. An insider might purchase shares in a company expecting their value to rise after an upcoming merger announcement. This can allow the insider to sell those shares at a higher price after the merger, making them more money than they would have if they’d waited until after the news broke before buying in.

The ability to diversify your portfolio without having an account at every brokerage firm

Insider trading laws allow you to buy stock in a company even if you don’t have an account there. If you find out that one company is about to be acquired by another company and its stock price will rise; as a result, you can buy shares of the target company even if you don’t own any yet. This allows you to diversify your portfolio with little effort while keeping costs down because you don’t have accounts at every brokerage firm.

Increased liquidity

A company’s share price will rise if more people are willing to buy its stock because they expect it to increase value. Insider trading allows more investors to participate when they know something good will happen soon and want to invest without waiting for others to catch up with them. For example, suppose an insider knows that a new product launch is going well and expects strong sales results for this quarter. In that case, they may choose to sell some shares immediately so that they have enough cash on hand when the news breaks and demand increases dramatically for those shares.

Higher returns on investments

Insiders generally have more knowledge about their company’s prospects than outsiders do so that they can make better investment decisions than other investors. This means that they can potentially earn higher returns on their investments than those who trade based solely on publicly available information.

Greater transparency

The most crucial benefit of insider trading is greater transparency. If a company knows that its employees are making profitable trades based on inside information, steps can be taken to prevent it. For example, suppose an employee has access to confidential information about a merger. In that case, they might be able to profit by buying or selling shares of the target company before the announcement. This could cause stock prices to rise or fall dramatically and lead to losses for other investors who are unaware of the same information.

The SEC believes that the best way to prevent insider trading is by making sure that all companies have robust compliance systems in place. These systems include educating employees about securities laws and putting systems that monitor trading activity so that suspicious trades can be investigated immediately.

More efficient capital allocation

Insider trading allows investors to get information about companies before making them public. This will enable investors who have access to this information to make better-informed decisions about where they invest their money. These decisions may lead them to invest in a company before it becomes publicly traded or invest in a company that has already been publicly traded but is undervalued at its current price.

This means that insider trading may lead to more efficient capital allocation — where the market allocates resources based on the value of those resources rather than on how much money someone has available for investment.

How Investors Can Profit Via Legal Insider Trading

This is the trading of shares based on information not available to the public. Insider trading can be legal, but it’s illegal if you’re a corporate officer or employee and buy or sell your company’s stock. The SEC regulates insider trading and has rules to ensure fair markets.

Generate Ideas for Investing

There are many ways to generate ideas for investing. One of my favorite ways is to read the news and look for events that impact the stock market. For example, if you see that a major company has just declared bankruptcy, that can be an opportunity to buy its stock at a discount. If you are aware of any coming trends or changes in legislation (for example, if you know that there is a pending decision by the Supreme Court), you may want to invest in companies that will benefit from those changes.

Connect the dots on a stock

Once you have an idea of which company you want to invest in, it’s time to learn more about them. What makes this company unique? How are they fairing compared to their competitors? Where do they make money, and where do they lose? These questions should be answered before deciding.

Use insider trading to predict earnings.

In general, it is illegal for investors to trade on nonpublic information. However, some exceptions to this rule allow you to profit from insider tips. For example, get a recommendation from an “insider” at a public company that isn’t privy to quarterly earnings or other sensitive information. You can legally use that information to make trades in the stock market. The insider trading laws don’t apply because there’s no breach of confidentiality.

Use it as a guide to positive surprises.

When it comes to insider purchasing, buybacks are a great sign that management believes in their product and sees growth potential for its stock price in the foreseeable future. In some cases, insiders may purchase shares ahead of an upcoming announcement that could significantly drive share prices over short periods (especially if they believe that the market will react positively).

If insiders are selling off their shares en masse and cashing in their profits, it could indicate that they have some terrible news up their sleeves and don’t expect their stock price to rise much further before they do something with their shares.

Follow the Money Flows.

Where is the money going? You can know about this by looking at the performance of the stock or bonds and then comparing those performance numbers with other similar investments. The key is to look at what other investors are doing with their money. If they’re investing in a particular company, then there’s a good chance that the company will perform well. If they’re moving their money out of a company, then that company’s performance will likely suffer.

Go contrarian to analyst calls.

Analysts are paid to provide opinions on companies, but they often miss out on essential developments because they’re too busy following corporate earnings reports and other financial updates. It can be beneficial for an investor to take a contrarian view of analyst calls and buy up shares of companies that analysts have been bashing or selling off because they don’t like them anymore (or think they’re overvalued).

Examine other ways insiders get rich

Insider trading isn’t the only way corporate insiders can make money from their companies. Many insiders receive lucrative bonuses and options grants just for doing their jobs well. Some even have non-compete agreements that prevent them from working elsewhere for a certain period (typically two years).

Piggybacking Government Insider Trading

While most people don’t think of insider trading as a legitimate strategy, it can be used to your advantage in certain situations. For example, if you know that the government is about to release essential information (such as an FDA approval), consider buying shares before the announcement is made public and selling them after it hits the news wires. The key is having good timing so that prices haven’t dropped too much when you sell due to negative news or other factors.

Utilize insider trading as part of a larger strategy.

Insider trading is a great way to boost returns, but it should be used as part of a larger investment strategy, not as the only tool in your arsenal. Insider trading can give you a significant edge over other investors, but it’s not for everyone. Insider trading might not be for you if you don’t have enough time and money to research and analyze stocks. However, if you have time and money to devote to your investments, insider trading might suit you.

Insider buying, market movements, and ETFs

Insider buying is another way investors can profit from legal insider trading. Companies often announce when they will buy back stock or make other moves that affect their share price (such as dividends). Investors can make significant gains without breaking any laws by monitoring these announcements closely and acting quickly on them.

Market movements can also provide opportunities for investors who know how to spot them in advance. For example, if one company announces the news that impacts its competitors’ shares, they may also see a corresponding increase in their prices.

Do you have to pay taxes on legal insider trading?

The answer is yes. The reason for this is that the IRS considers any profit from insider trading as income and therefore taxable. The only exception is if the person does not sell the stock or make a trade within 30 days of receiving the information. In such cases, it can be argued that there was no intent to profit, and therefore no taxable event occurred.

However, there have been many cases where people have been convicted of insider trading even though they did not sell the stock immediately after receiving it. The courts had held that even if there was no intent to profit at the time of receiving the information, there might have been an intent at some later date when one did finally sell their shares or make trades with them.

To avoid these problems, it is a good idea to report all profits made through legal insider trading on your tax return since doing so will put you in a better position to defend yourself against any future allegations of wrongdoing by showing that you were being honest about your income from this source in years past as well as future tax returns.

Legal vs. Illegal Insider Trading

The law allows insiders to buy and sell stock in their own companies if they do so on the open market. The trades are reported to the Securities and Exchange Commission (SEC) within two business days of the transaction. The SEC requires this reporting to ensure that insiders aren’t profiting from confidential information they have access to as part of their jobs.

In contrast, illegal insider trading occurs when an insider trades on material non-public information before making a disclosure to the public or disclosing it to regulators. Material information includes earnings, revenue forecasts, and anything else that might affect a company’s stock price.

The most important difference between legal and illegal insider trading is that legal insider trading is done on the open market. In contrast, illicit trading insider involves private transactions between individuals privy to confidential information about a public company.

Conclusion

If done right, taking advantage of insider trades can be an excellent method of increasing one’s portfolio. And while there are limitations on what tips you can receive and trades you can make based on that information, it is still possible to profit greatly from this activity. Investors, both novice and experienced, will find this article helpful in understanding the ins and outs of insider trading.

References

https://tearsheet.co/uncategorized/12-ways-investors-can-profit-via-legal-insider-trading/

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About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept: Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

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