Insider Trading: How to Stay Out of Trouble

Understanding what is insider trading and how you can avoid getting into trouble

UPDATED: March 2022

Insider Trading: How to Stay Out of Trouble – Everyone knows that owning company stock carries financial risks. However, it comes as a surprise to many employees that trading company stock can actually get you into serious legal trouble, including criminal liability.

Insider Trading: How to Stay Out of Trouble

Two major ways in which you can, even accidentally, break the securities laws are called insider trading and insider tipping. This article will explain what you need to know to stay out of trouble when you trade any company’s stock.

The Basics of Insider Trading and Tipping

There’s no doubt in anyone’s mind that insider trading is illegal. It occurs when someone trades stock or other securities on the basis of what is termed material nonpublic information (MNPI). MNPI is confidential, proprietary information about a company that will affect its stock price either positively or negatively when the information is made public.

Insider tipping is also illegal. It means sharing MNPI with others. The laws against insider trading and tipping apply to everybody. They don’t apply only to company insiders or executives, though their positions tend to put them at more risk than ordinary employees.

Insider trading and tipping are considered violations of securities law because they give certain people an unfair investment advantage over other investors and therefore undermine the fair operation of the capital markets. If the capital markets were to lose public trust and confidence, the investment would fall, to the detriment of companies and the economy.

What Constitutes Insider Trading?

The insider trading laws apply to MNPI not only about a company you work for but also about any company you may know through a professional or personal relationship, e.g., through a family member who works for that company or through your company’s vendor, supplier, or client. The SEC now wields a formidable array of digital technology to spot, track, and examine links between people involved or connected with suspicious stock trading activities.

The SEC uses sophisticated data analytics, including pattern recognition, to detect suspicious stock trading. The SEC’s ATLAS tool lets the agency’s staff harness multiple streams of data, including blue sheets, pricing, and public announcements. The tool is routinely used to look for insider trading before a major equity event, detect serial insider trading, and research historical securities prices for litigation.

What is Insider Tipping?

Insider tipping is illegal and closely related to insider trading. It means sharing MNPI (Material Non-Public Information) about a public company that may motivate the recipient to trade that company’s securities (e.g., shares or call options). This is illegal because the tipped-off trader gains an unfair advantage over other investors from the movement of the stock price that will occur when the information is made public.

Insider tipping can occur in person, by phone, via the mail, by email, or on the internet. The tipping is illegal if:

  • The person who receives the inside information knows or has a reason to believe that the tipper is breaching a fiduciary duty.
  • The tipper gets some tangible or indirect benefit from the tipping.
  • The tipper passes on the tip with the expectation that the recipient will try to profit from it.

When you tip someone, e.g., a friend or a relative, who then trades securities according to the inside information, you may be held accountable for up to three times the profit gained or loss avoided, plus disgorgement of the trading plans if your tipper can’t pay.

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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 .

How to Fully Benefit from Monitoring the Trades of Company Insiders

The best way to use insider trading information to your benefit

UPDATED: April 2022

How to Fully Benefit from Monitoring the Trades of Company Insiders – Insiders are the executive managers and directors who are in front of the financial and strategic decision making of their firm. Insider trading activity is very informative to follow because their trades tell us something about the valuation of stock since insiders know their business better than anyone else. As a consequence of having performed months of empirical research on insider out-performance and having read all papers covering the topic, our knowledge on the topic is extensive.

How to Fully Benefit from Monitoring the Trades of Company Insiders

Our experience tells us that there are several significant misgivings and misunderstandings regarding insider information. In this article, we will discuss the biggest misunderstandings and provide some valuable information to take into account if you want to follow up on insider trades for investment purposes.

1. Take Insider Purchases in Consideration to Reduce the Impact of Human Emotions

Every investor knows the feeling of hesitation regarding an investment decision as it can have a strong impact on your wealth. These emotions are particularly present when the stock makes a sudden steep drop or if the share price is depressed for a significant time period. Due to this biased behavior and a lack of knowledge about the firm, potential buyers oftentimes don’t engage in strong buying opportunities, and owners sell out of fear that they will lose even more money.

If you feel like you are beginning to trade based on emotions rather than facts, insider activity can help with making investment decisions. If you are hesitating about a stock, check out whether insiders were buying recently. As these insiders know perfectly how their company is doing, this can increase your knowledge about the company’s prospects.

2. Take Insider Purchasing Activity More Seriously When They Trade in Clusters

Many empirical papers have been written regarding the most informative insider trades. One of the most significant findings came from Alldredge et al, who found that clustered trades (multiple insiders buying close to each other) outperform solitary trades significantly. They found that the one-month abnormal return (return in excess of the market movement, taking into account the stock’s risks) for clustered insider trades was 2.1% compared to 1.3% for solitary trades, a significant difference.

This is intuitive because when many insiders buy their stock, the probability of undervaluation could be higher. Thus, if you are taking into account insider purchases in your investment strategy, clustered purchases are more informative than solitary ones.

3. Don’t Give Attention to Insider Trades, It Doesn’t Tell You Anything About Returns

The biggest misunderstanding regarding insider trades is about the insider sales information. There’s much empirical evidence that contradicts the statement that insider sales are negative for the stock. Insider sales have no relationship with future stock returns as there are many reasons to sell a stock, such as wealth diversification, exercising granted stock options, and freeing money to buy other things. Therefore, one should not look at insider sales at all.

Many insiders such as Mark Zuckerberg from Facebook and Tim Cook from Apple just sell shares regularly because they want to cash in some options. That doesn’t tell us anything about the stock’s valuation.

Conclusion to How to Fully Benefit from Monitoring the Trades of Company Insiders

Insider information can be very valuable to include in your investment strategy. However, there’s a wide divergence in performance between the hundreds of purchases each month. For example, routine trades are not informative, solitary trades are less informative, and insiders outperform, particularly in value stocks, proven by empirical evidence. We suggest taking the tips provided in this article into consideration when you analyze insider trades in the future. It could improve your returns significantly.

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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 .