Insider Trading Is of More Than One Kind. Here's Why.
UPDATED: March 2022
Insider Trading Is of More Than One Kind Here's Why. - Using trading plans and stock for compensation for buying and selling shares is a common practice among insiders for major corporations. You shouldn't automatically see all insider trading activity as actionable because the reasons for their trading activity could be different and driven by their motivation rather than any significant change in market conditions.
Insider Trading Is of More Than One Kind Here's Why.
Most people assume that when insiders and management are making trades, it means something big will be happening regarding that company's stock price. However, all trading activity is not driven by the same motivation, and hence, should be understood on its own terms. Similarly, an insider's shares can't be observed the same way as the stock you hold.
So, if you're looking at insider trading activity and trying to make sense of it all, know that all of it not of the same kind. Here's why.
1. Stock Is Used as Compensation
Most times, a corporation will reward its senior management by offering them stock as compensation for their income payments. Therefore, when you notice a significant number of stocks being bought by a senior official in a company, it could be that the corporation is rewarding them. You can't assume that something big is happening in the company.
When senior management decides to purchase stock in their company, it doesn't mean that stock price will rise significantly in the coming weeks and months. However, it does point to the fact that they think the stock is undervalued at this moment in time. Conducting a little analysis of the company will give you a better idea of exactly where the stock price stands concerning the market.
2. The Use of Trading Plans to Sell Shares
Insider trading informed by private knowledge is limited by SEC's Rule 10b5. That ensures insiders don't gain any advantage against individuals without this knowledge. Insiders can't sell shares before any negative news comes to light, and they can't buy shares cheaply before any news breaks that significantly raises the price of the shares. So what do insiders do in that scenario?
They use trading plans, allowing employees to trade their company's stocks while removing insider activity from the scenario. Trading plans have a simple function:
- They are put in motion ahead of time and must be enforced before insider information leaking to the public.
Recognizing trading plans is relatively simple and gives you the knowledge you need to make fair trades without relying too much on insider trading activity.
Conclusion of Insider Trading Is of More Than One Kind Here's Why.
When looking at insider trading activity, the one thing that you can't do is to project and assume regarding the performance of a company's stock. You can't read too much into insiders' actions as that won't help you make better investment decisions. You can't take action based on someone else's decision to buy or sell stock in the corporation. Insiders have their motivations for buying and selling stock, and you must look at all the factors before deciding to act on insider trading information.
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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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