Advantages and Disadvantages of Insider Trading

Figuring out the pros and cons of insider trading and how it can benefit you

UPDATED: April 2022

Advantages and Disadvantages of Insider Trading – A debate rages on in the financial community among professionals and academics about whether insider trading is good or bad for markets.

Advantages and Disadvantages of Insider Trading

Insider trading refers to the purchase or sale of securities by someone with information that is material and not public in the realm. Insider trading is not limited to company management, directors, and employees. Outside investors, brokers, and fund managers can also violate insider trading laws if they access non-public information.

Advantages of Insider Trading

The advantages of insider trading, defined as buying and selling stocks based on information originating within the relevant organization or business that is not publicly available, are clear. Those engaged in insider trading are partaking in a low-risk, high-reward practice that can reap considerable financial rewards. Insider trading is commonly assumed to be entirely illegal, but there’s a legal means of trading in stocks with inside information.

Employees and corporate officers are legally entitled to trade in the stocks of their own company. As long as those transactions are properly reported to the U.S. Securities and Exchange Commission (SEC), the transactions are perfectly legal and highly profitable.

Insider Trading Is Illegal?

Insider trading is illegal and has landed many investors in legal trouble, including spending years in prison, when it involves individuals outside of the corporation in question who buy or sell stock in that corporation based on information provided from individuals inside the corporation, who are privy to sensitive, proprietary information not accessible to the general public.

Illegal insider trading includes buying and selling stocks, the change in value that can be inferred logically from information an individual possesses about a particular corporation based on their association with that corporation. An example could include employees or officers of financial services companies doing business with the corporation whose stock they are trading.

Disadvantages of Insider Trading

In the case of illegal insider trading, the disadvantages are clear: prosecution by the U.S. Department of Justice and civil suits filed on behalf of shareholders by private and government agencies. Violations of laws restricting insider trading carry significant financial penalties and can, as noted, involve prison sentences. Among prominent individuals convicted of insider trading are:

  • R. Foster Winans, a former reporter for the Wall Street Journal. He was convicted of providing information attained in the performance of his duties as a reporter for the financial benefit of friends.
  • Ivan Boesky, one of the faces of the massive insider trading scandal of the late 1980s. He was fined $100 million and sentenced to three and a half years in prison.
  • Television personality Martha Stewart. She was fined and sentenced to ten months in prison.
  • Jeffery Skilling, Enron’s former CEO. He brought the company to the center of an enormous accounting scandal that resulted in him being fined $45 million and sentenced to two years in prison.

Conclusion to Advantages and Disadvantages of Insider Trading

When considering the Advantages and Disadvantages of Insider Trading, the major factors are: The advantages of insider trading, the reason it is commonly practiced, is the potentially enormous financial gains it can provide. The disadvantage is, when conducted illegally, it can lead to public exposure, heavy financial penalties, and a prison sentence.

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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.)

Use of Our Articles: You are welcome to benefit from lots of FREE articles that you can read and learn from on our website blog.  You are also welcome to share or post this information as helpful content to your website or blog audience as long as the article, and this entire byline are left intact, word for word.  If you would like us to provide you with more, or bulk content for your blog or website to educate your audience on basic to expert financial and investor information & techniques, feel free to contact us at info@buybackanalytics.com .

Why Bigger is Better for Stock Buybacks

The reasons why it’s better to focus on larger stock buybacks

UPDATED: April 2022

Why Bigger is Better for Stock Buybacks – Stock Buybacks have traditionally served as a strong indicator for companies that believe their stock is selling at a discounted price. However, with so many stock buybacks to sift through – more than 300 so far this year – where does an investor start? The size of the stock buyback specifically relative to the company’s market cap is a good place.

Why Bigger is Better for Stock Buybacks

The case for large stock buybacks comes down to proportion: the bigger, the better. A $1 billion stock buyback for a $100 billion market cap or 1% of outstanding shares isn’t nearly as meaningful as a $100 million buyback for a $1 billion market cap company or 10% outstanding shares.

An analysis by EquityCompass Strategies of 10,070 unique buyback announcements from December 1995 to April 2010 shows companies that announced a stock buyback greater than 10% of outstanding shares outperformed the S&P 500 by 3.26% over the next month. Comparatively, companies that announced a stock buyback equated to less than 5% of outstanding shares outperformed the S&P 500 by only 1.77% over the following month.

Regulations and Rules for Buying Back Stock

Companies are governed by rule 10b-18 when it comes to buying back stock, or repurchasing their own shares. Some conditions specify what a company can do, including a repurchase limit of up to 25% of the average daily trading volume. This large trading volume provides companies with the opportunity to influence their share price.

Small Stock Buybacks vs Large Stock Buybacks

Companies with large stock buyback announcements can continue to purchase stock at a high percentage of trading volume for a week or even months, providing a catalyst to actually drive up the price of the stock and potentially squeeze short-sellers along the way. On the other hand, companies that announce only a small stock buyback in terms of percentage shares outstanding have only a limited opportunity to use the trading volume to influence the stock price.

Several companies with recent stock buyback announcements showcase the impact a large buyback can have on the stock’s performance. Large stock buybacks, where management has conviction, can be a powerful tool for investors evaluating opportunities in the market. The size of the stock buyback as it compares to the company’s outstanding shares is the number to look out for.

Conclusion to Why Bigger is Better for Stock Buybacks

The bottom line for companies considering buying back stock in their own company is that bigger is better. If you are going to repurchase shares, usually buying back the largest amount your company can afford is the best way to benefit from a stock buyback. However, before doing any stock buyback you need to consider whether it makes sense to do the share repurchase at all. There are many reasons why it does not make sense to engage in a stock buyback. So, to find out when it is wise to buyback stock, and when it is not wise, please search our site for other great articles on stock buybacks here, here, and here.

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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.)

Use of Our Articles: You are welcome to benefit from lots of FREE articles that you can read and learn from on our website blog.  You are also welcome to share or post this information as helpful content to your website or blog audience as long as the article, and this entire byline are left intact, word for word.  If you would like us to provide you with more, or bulk content for your blog or website to educate your audience on basic to expert financial and investor information & techniques, feel free to contact us at info@buybackanalytics.com .

Do Share Buybacks Deserve More Regular Scrutiny

The impact of share buybacks and whether they should be scrutinized

UPDATED: April 2022

Do Share Buybacks Deserve More Regular Scrutiny – In 2020, U.S. companies spent $1 trillion to buy back their shares, while they spent $4 trillion to do so between 2008 and 2019. This is raising strong criticism from different quarters in the political sphere, as not only do key Democrats consider it an anathema, but Republicans also proposed to end the preferential tax treatment of share buybacks.

Do Share Buybacks Deserve More Regular Scrutiny

There is no substantial financial and economic difference between the distribution of a special dividend and a share buyback. However, dividends are taxed immediately, while share buybacks induce an unrealized gain until shares are sold, allowing for tax deferral. From a policy perspective, the sudden surge of share buybacks could be explained as an unintended consequence of the recent tax cuts.

Should legislators address stock buybacks? One might argue that U.S. stocks will lose the major support they get from buybacks as the quality of corporate debt deteriorates and economic growth slows. However, regulators may still take a closer look.

Corporations Need Equity Flexibility for Stock Buybacks

The debate on stock buybacks revolves around the greed of corporate management and the spending of money to benefit shareholders rather than the wider economy. However, to assess the validity of these concerns, it is important to look at the economic fundamentals of why share buybacks make sense from a balance sheet standpoint.

In a number of ways, companies manage their equity to maintain the equilibrium between financial stability and their funding cost. Share buybacks create double leverage. They reduce the equity, and they increase the debt or reduce the cash. They have, therefore, a serious impact on the robustness of the balance sheet of companies. If a company decides to increase or decrease its capital, it must be for structural and long-term reasons.

Therefore, a share buyback should occur for structural reasons and a view to the long-term balance sheet. A few key examples of when a share buyback might be sensible are:

  • A structural change of a company business model
  • An excess of cash on the balance sheet that is unlikely to be deployed by investments or acquisitions
  • A structural under-leverage that will not be corrected in the foreseeable future
  • A clear desire to create long-term shareholder value

A share buyback is the opposite of an increase of capital needed to finance growth. In a sense, a share buyback recognition that the company doesn’t have anything better to do with its money than return it to shareholders.

The Process of Deciding on Buying Back Shares

Buybacks should resonate with a company’s views of its financial stability, investments, acquisitions, strategy, and business model. Good governance practices should, therefore, be used in reaching buyback decisions, especially since a buyback can affect the very voting metrics with which it’s decided.

A blanket authorization at a company’s annual shareholder meeting to the management proposing a share buyback is weak governance. Management should explain the impact of stock buybacks and why the company doesn’t need equity for the foreseeable future, despite its growth strategy. The board of directors is rarely presented with such an explanation and tend to assume share buybacks create shareholder value, which is just one of their mandates.

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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.)

Use of Our Articles: You are welcome to benefit from lots of FREE articles that you can read and learn from on our website blog.  You are also welcome to share or post this information as helpful content to your website or blog audience as long as the article, and this entire byline are left intact, word for word.  If you would like us to provide you with more, or bulk content for your blog or website to educate your audience on basic to expert financial and investor information & techniques, feel free to contact us at info@buybackanalytics.com .