Understanding the Different Types of Insider Trading

The different types of insider trading you should know about

UPDATED: March 2022

Understanding the Different Types of Insider Trading – The Securities and Exchange Commission (SEC) continues to lead a serious crusade against insider trading, and for good reasons.

Understanding the Different Types of Insider Trading

You need to be clear on the different types of insider trading present today if you are to make it work in your favor. Contrary to popular belief, not all insider trading activities are illegal. To be on the safer side of the law, we will need to go into all the vague details that separate legal and illegal insider trading activities.

Legal vs. Illegal Insider Trading

Legal insider trading happens all of the time. You’ve probably heard of employees of a publicly listed company trading equities of a company they are working in. Insider trading of this nature is perfectly legal as long as corporate insiders report their trades in the correct manner depicted by SEC regulation.

However, illegal insider trading refers to any activity based on corporate information that is not disclosed to the public. Such trading activity undermines everyone’s confidence in the integrity and fairness of the equities market. Additionally, it is deemed as a breach of trust and fiduciary duties of the employee to the company.

In most instances, the line that separates legal and illegal insider trades is clear and obvious. However, there are some cases when that line can be muddied up a bit. For example, when a trader overhears an important conversation between two executives of a company and proceeds to trade the company’s stock based on the information he heard.

You can make an argument of that trade being unethical and unfair since it does make use of information that’s not available to the general public. However, the law doesn’t encompass this scenario, so it is still considered legal.

Types of Illegal Insider Trading

There are certain types of illegal insider trading that you should be aware of if you are thinking about trading in the market today. These include the following:

* Classic Insider Trading

The most widely understood illegal insider trading activities are classic ones where a company’s top-level executive knows undisclosed information of the corporation and buys/sells company stocks based on those non-public materials. The details may vary slightly, but in this instance, it’s a clear-cut illegal insider trading scenario.

* Insider Tipper and Insider Tippee

A common illegal insider trading scenario is when an employee of a company who is privy to essential non-public information doesn’t trade the company’s stock directly. Instead, he passes the information to another person who will use the information to profit from it. In such cases, both the tipper and the tippee are liable for illegal insider trading activities.

*  Misappropriation

Another illegal activity closely related to insider trading is the misappropriation of a company’s information for personal gains. For example, an investor is being invited by an investment banker who is trying to gather capital for a certain company. The investor was asked to sign a non-disclosure agreement.

The banker proceeded to give the investor the company’s state and why it needed to raise capital. The investor refused to take part in the offer, but when the meeting is done, the investor called his broker to sell his shares of the company. The investor is guilty of misappropriating information given to him in confidence and trust.

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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 .

5 Ways Investors Can Profit Via Legal Insider Trading

How to make legal insider trading work for you and profit from it

UPDATED: April 2022

5 Ways Investors Can Profit Via Legal Insider Trading – Insider trading has been the talk of the town when it comes to the stock market and trading on the stock exchange. While insider trading is being taken to the woodshed, there’s plenty to do with legal insider trading.

5 Ways Investors Can Profit Via LEGAL Insider Trading

By following the smart money, investors can follow the cookie crumbs back to the investing profits. So, here are 5 ways that investors can use insider trading data and information to make better, smarter investment decisions.

1. Generate Ideas for Investing – Profiting from Insider Trading

Investors come up with investment ideas in many different ways. We can use insider trading data to bubble up ideas in companies you would have never heard of otherwise. You can use stock screeners to look for a specific type of buying (say multiple insiders buying stock). From there, you dig deeper into the stocks that show up on the screen and do more research. The insider activity functions as an idea generator to find interesting investment candidates.

2. Follow the Money Flows – Profiting from Insider Trading

When fishermen go deep sea fishing, they use sonar to track the fish, so instead of waiting for a bite, they go where the fish will be. Investing is no different as people want to invest in things that they think will turn out profitable in the future. Insiders do too, which is why they put their money where their mouths are. For a senior manager to put some cash down and buy some stock in their company, it’s a bet on the future.

3. Go Contrarian to Analyst Calls – Profiting from Insider Trading

Investment analysts frequently get stock pickings wrong. These smart people can’t always win as the business is tough. It doesn’t particularly reward bold predictions and, most of the time, analysts are reactive, raising and dropping predictions in hindsight. Insiders are more likely to buy shares when their stock is out of favor with Wall Street analysts. In other words, insider trading has predictive power for future stock returns only when analyst recommendations have changed. If insiders are looking for value, they’ll buy when the stock is out of favor.

4. Examine Other Ways Insiders Get Rich – Profiting from Insider Trading

Insider trading is transparent (the activity is, at least). However, corporate insiders may use other tools to enrich themselves that make it harder for the rest of us to mimic. One of these activities places them directly across the table from other shareholders. There’s evidence that insiders use share buybacks to exploit their access to insider information and make profits at the expense of public shareholders. Managers may initiate share buybacks if they believe they can purchase stock below its fair value through a buyback or sell if the market price is bloated.

5. Piggybacking Government Insider Trading – Profiting from Insider Trading

Recent evidence that government officials exploit insider information (even if it’s not insider trading) isn’t necessarily surprising as congressmen and women seem to regularly make money off of their positions. Members of Congress routinely receive access to confidential information and act upon it. Following politicians to see what they’re investing in is a great signal to where legislation is headed in the future. This could have a broader impact than just on the stocks, and it’s important to follow the money.

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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 .

Legal Insider Trading: What Is It, and How It Affects Investors?

Understanding legal insider trading and its impact on investors

UPDATED: April 2022

Legal Insider Trading: What Is It, and How It Affects Investors? – Most people assume that insider trading is always illegal. The term has been associated with scandals and names such as Enron, celebrity businesswoman Martha Stewart, and former Goldman Sachs director Rajat Gupta.

Legal Insider Trading: What Is It, and How It Affects Investors?

If you type “insider trading” in Google’s search box, the first hit is a definition from Google: “the illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information.” This is inaccurate at best because the term “insider trading” includes both legal and illegal conduct.

Illegal insider trading is considered an act of security fraud. The Securities Exchange Act of 1934 makes it clear that any person who purchases or sells a security while in possession of “material, non-public information” shall be held liable. This term applies to “corporate insiders,” such as managers, directors, or employees, as well as de-facto insiders who obtain material, private information from various sources. You could overhear some important news when dining at a restaurant, but trading on such information could potentially constitute illegal insider trading.

You can’t even ask your friends to profit from the information because “tipping” the information violates the law as well. Information is material if there is a substantial likelihood that it will affect a company’s stock price once released. In practice, it is usually difficult to prove how “material” information is. As such, illegal insider trading is very difficult to detect and prosecute.

The legal conduct of insider trading refers to trading by “corporate insiders.” A long list of people falls into this category, including directors, managers, employees, beneficial owners, and people affiliated with the firm in other significant ways. These people are allowed to trade securities of their firms, provided they do not possess material, non-public information.

Trades by corporate insiders must be filed with the U.S. Securities and Exchange Commission within two business days. Although these trades are not supposed to contain material information, many people believe that these trades reflect information that is not material enough to be released otherwise. Academic studies also find that insider trades can predict future stock returns and earnings.

Consistent with what people would expect, insider purchases seem to move stock prices more than insider sales do, and trades by managers and directors seem to move stock prices more than other traders do. Following insider trades, especially the large purchases by directors and managers, can be a lucrative trading strategy for sophisticated investors.

Should All Forms of Insider Trading Be Prohibited?

While many people might feel insider trading is not “fair” to outside investors, economists have long attempted to answer the question from the perspective of shareholder wealth and cost of capital. Empirical evidence so far suggests that illegal insider trading may have adverse effects on the general information environment and can thus increase a firm’s cost of capital and decrease a firm’s market value.

However, some researchers argue that legal insider trading could benefit shareholders by making stock prices more informative, which further lowers the cost of capital and increases firm value.

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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 .