Insider trading Is trading in stocks or other securities (It could be like stock, as well as bonds or stock options), carried out by individuals with access to non-public information about the company. In most countries Trading company insiders, such as board members, key personnel, directors, major shareholders, is legal. Such trading does not imply the use of access to non-public information..
In the United States and several other jurisdictions, data on trading operations performed by employees, key employees, directors and major company shareholders (in the United States, these include owners of ten percent or more of the company's capital) must be provided to the regulator or publicly disclosed. This information is usually disclosed within a few days after the transaction.. Many investors follow these insider trading summaries in the hope that, that emulating these deals will be profitable.
Insider Trading and Trading Videos
Maybe, absolutely all people, who decided to connect their lives with trading, or while they are just considering this area as an additional income, at least indirectly related to the issue of psychology, and what role does it play in trading….
Legal Insider Trading
"Legal" insider trading cannot be based on the use of non-public information. Nevertheless, some investors, and me included, believe, that insiders are more aware of the state of affairs in their companies (if not given in detail) and that their deals reflect important information. And as you will see further, In most cases, this is the case.
Legally compliant insider trading is widespread, since the employees of the companies, whose shares are traded they often have shares or options on the shares of these companies on the stock exchange. These transactions in the United States are made publicly with the completion of SEC forms, mainly forms 4. To 2001 of the year, US legislation restricted transactions as, so that insiders traded mainly at the time, when their inside information went public, such as, after the release of the earnings release. Immediately, it's easier with this, Securities and Exchange Commission rules qualify, that the U.S. prohibition against insider trading does not require proof of, that the insider actually used non-public information when making a deal. Immediately, there are deals popping up before the turninges, or other important events.
Illegal insider trading
Regulations against insider trading based on non-public information coexist in most countries around the world, although their details and efforts to provide them vary considerably.
Definition of "insider"
In the United States, employees of a company are recognized as corporate insiders for statutory reporting., directors and shareholders, owning more 10% share capital of the company. They are exactly the insiders.. Insider company, accepting a job offer from a company, undertakes an obligation to its shareholders to protect their interests above their own in matters relating to the company's activities. When an insider buys or sells, based on corporate information, he is violating his obligation to shareholders.
For example, illegal insider trading can take place if general managerCompany A learned (before public announcement), that his company will be absorbed, and bought its shares knowing that their price is likely to rise.
Why Insiders Post Their Trades
Firstly, the main reason is of course, legislation, and the second, also no less important for them, it is a responsibility to shareholders.
While proving, that someone should be held accountable can be hard, because traders may try to hide behind nominal owners, offshore companies and other trustees. Nevertheless, The U.S. Securities and Exchange Commission is prosecuting more than 50 affairs every year. Many of them are resolved administratively before they are brought to court.. The Securities and Exchange Commission and several stock exchanges actively monitor transactions, tracking suspicious activity.
Insider Trading Monitoring
Ever since insiders are required to report on trades, others often watch these transactions. In addition, there is a separate investment concept, in which insider behavior takes the lead. Just this concept, we will follow. Certainly, there may be a risk, that an insider purchases shares specifically to increase investor confidence or sells shares in defiance of the company's financial condition (for example, to diversify assets or to buy a home), but we'll look at all this later..
What are insider trading and why it is important to track them
Hearing the words "insider trading", many, maybe, remember the trials of a number of senior corporate managers in the 80s. However, there is no need to worry: insider trading is perfectly legal, and observing them can be of great benefit to traders. Insider buying or selling information can often predict possible changes in the stock price.. Insider deals, usually, are not in themselves a signal to buy or sell shares, but can serve as a valuable tool to validate decisions.
Who is an “insider”?
US Securities and Exchange Commission, SEC, considers as insiders (insiders) majority of shareholders (private and institutional), owning more than 10% shares of this company, as well as all of its senior officers and directors. Insiders are the elite share of shareholders, who often has information, inaccessible to the general public. With this information, insiders can make huge profits or avoid major losses., before the bulk of investors see a good opportunity or impending threat.
Since senior officers and directors have fiduciary responsibilities towards shareholders, SEC bans insiders from buying or selling shares based on confidential information, which they have. To minimize the possibility of insiders committing illegal transactions, Securities Law 1934 G. requires them to provide information on all direct and indirect investments. Shares are considered as indirect investments, which are controlled by an insider, although owned by another legal entity, such as a family member, trust or even company, of which the insider is a member.
The SEC requires companies to submit four different forms, where transactions with shares are reflected, committed by their "insiders".
Insider Trading Activity
If the law prohibits insiders from selling or buying shares based on confidential company information they know, why is this information important?? How do you understand, there are many ways to interpret graphs, figures and statistics. Likewise, you can interpret news in different ways., received from the company. And who can know more about the position of the company - analysts or its senior officials? In most cases, senior managers and directors have a better view of future growth prospects.
How important is insider trading?
It depends on different circumstances. Selling shares by insiders is not uncommon and is often misinterpreted. Insiders may seize the opportunity or sell shares for personal reasons, associated with buying a new home, divorce proceedings, tuition fees, diversification of deposits or taxation, - ie. for the same reasons, by which other investors do it. However, the sale of shares by insiders deserves close scrutiny., if it is carried out by senior officials in large volumes against the backdrop of poor fundamentals and / or excessive soaring in the share price. On the other hand, buying shares by insiders is almost always a positive signal, as it reflects their faith in the company. Besides, the more shares are held by top managers, all the more likely, what solutions, which they take, will be directed to the benefit of shareholders, since the company's leaders are themselves the largest shareholders.
It is necessary to pay attention to the fact, who buys shares. Very good, if the number of shares grows, bought by managers of a lower level, e.g. vice presidents, not senior vice presidents. Their net income is always less, and their increase in the cost of acquiring shares in their company is a good sign. It is no coincidence that Peter Lynch (Peter Lynch), author of the bestselling book Someone Climbed Wall Street (“One Up On Wall Street”), States: “I'd rather find five vice presidents, buying 1000 shares each, than one president, buying 5000 shares ".
It is also necessary to take into account the number of senior officials or owners of large stakes in the company., who bought or sold shares within a month. The presence of a certain trend is important here., because if large purchases and sales are carried out in approximately the same volume, then it is impossible to draw a conclusion about the direction of the trading activity of insiders.
Insider - what is it?
The American Securities and Exchange Commission considers, that an insider is a shareholder of a particular company, who owns at least 10 percentage of shares. Usually, such shareholders are a kind of managing center and head of the enterprise in one person.
Respectively, these people have direct access to non-public information, company-related. I.e, they know much more about the financial situation of the enterprise, than small shareholders. And about any events, which will lead to an increase or decrease in the stock price, they will also be the first to know. Until that moment, while such information is not disclosed - it is considered insider.
Insider trading is the execution of transactions using the same "non-public" information. use it, according to the legal regulations of most countries, in particular the USA and Russia - prohibited. But, according to the statistics provided by the SEC think tank - about 30 percent of all current stock market transactions are insider.
Why Insider Trading Is Prohibited
Insider trading is prohibited for a simple reason, that the very fact of its existence introduces a certain imbalance in the investment market. A small group of shareholders collects all the "cream", while small investors only count losses. If the situation was the same today, how before 1934 of the year (before this period, the concept of insider trading simply did not exist), then investments as such would simply not exist. It's time to say bluntly - it is on small investors that large companies are held., Brokers. Here the saying "With the world on a string" is more relevant than ever.. And if investor confidence is eroded, then the entire investment market will simply lose the lion's share of capital.
What happened in 1934 year? The so-called Pecora's law was passed., in which the concepts of the insider were described in detail, the use of "closed information" when trading stocks and about how, how can it bring down the whole stock market Of America. Simply put, Pecora's law completely outlawed insider trading in the United States. But for insider trading, the end did not come.. The investment market at that time simply could not survive such dramatic changes. And here is the first high-profile case, concerning insider trading, surfaced only in the 70s. Then the well-known company TGS, which was engaged in the extraction of natural resources, during research discovered a huge mineral "pool". Of course, as soon as this information gets into the media, then the price of TGS shares immediately increased several times. Charles Fogarty, Vice President, TGS, decided to seize the moment - he acquired a large block of shares at the current low price. Immediately after that, their price - increased, and Charles was able literally in a few days to get rich by almost 150 one thousand dollars. Due to the indignation of small investors, the fact of an insider deal very quickly “surfaced” and a high-profile court case began over the management of TGS. It ended with huge fines (Order 1,2 million dollars). Then the law, regarding the use of "insider signals" significantly tightened. Other countries followed the US example.
In the 80-90s of the last century, the phrase “false insider information” became a fairly common concept in the stock market.. It was also most often used by unscrupulous owners of large blocks of shares.. They spread false information through the media about the imminent collapse of the shares of one or another company., after which the price, of course, fell (market response is instant). And during the "embarrassment" period, you can purchase the entire company for a symbolic cost., the value of which on the stock exchange drops critically. A similar situation once played a cruel joke with the MISC company., which has developed processors with a unique architecture, several times more powerful than traditional x86 and x64 processors. Competitors, stating in the media, what MISC found when testing processors, as if their power is extremely low, and therefore such products will not be able to compete in the consumer market. Thanks to the publication of false information and the sharp collapse of the latter's shares, competitors just acquired a group of developers, and then they disbanded their entire department.
But you should still understand, that without insider information, the investment market could not exist at all. It's just that its profitability in this case would be extremely low. (no more 10-15 percent per annum). In modern conditions, it is much easier to monitor the actions of insiders., so their trades are simply copied in real time. Insiders have become a kind of signaling device for traders. Of course, while the first tried to "not step over the line" ... What kind of "devil"? According to all the same ill-fated Pecora's law, were recognized as insider trading by those, which occurred during one trading day with a subsequent sharp fall or rise in stock prices, event-related, which directly depended on the actions of the company's management or the main group of shareholders.
Where to follow insider deals?
http://www.insider-monitor.com
http://www.insidertrading.org
http://www.openinsider.com
http://www.insidercow.com
http://www.insidermonkey.com
http://www.www.secform4.com
