Thursday, 6 August 2009

Insider Trading: Using It to Get an Edge, Legally of Course

Insider trading - the illegal kind
Stock trading by insiders - the top management and directors of a company - normally makes the headlines when the insiders exploit their inside knowledge to unfair and illegal advantage by buying or selling based on material information that is not publicly available. Securities regulators and police step in to bring criminal charges with fines and possible prison as sanctions. CBC's "Insider Trading - What's the problem?" explains in more detail about illegal trading.

Legal insider trading - why should an investor care?
Stock ownership by a company's top executives is desirable for public investors - it aligns their fortunes with ours. Insiders are allowed to buy and sell shares of their own company and they are allowed to, and do use, within the rules, their intimate knowledge of the company to their advantage. Paying attention to what they do is worthwhile.

The rules require insiders to disclose both their holdings and their inside trades. When doing research on a company to decide whether to buy or sell shares, an investor is well advised to check out both aspects of insider stock ownership:
  • number of shares owned - if the managers and directors don't own many shares, don't have much "skin in the game", one has to wonder about their confidence and commitment
  • buying and selling - if the insiders are buying, it cannot be bad; if they are selling, it could be they feel prospects are bad, or perhaps they need the money for some other purpose; the rules don't require them to give a reason for the sale; another question is to look at is how many shares are being traded as large amounts would likely be more significant
Where to get insider trade info
  • SEDI (System for Electronic Disclosure by Insiders) - the regulator database, searchable by company and by insider for Canada
  • United States Securities and Exchange Commission EDGAR database
  • Toronto Stock Exchange Insider Trade Summaries - lists companies with the most active recent trading
  • CanadianInsider website - free search of Canadian companies plus purchasable reports that consolidate and present the data graphically.
  • - similar website covering US stocks, including Resource page with links to books and education sites.

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