Here are the Answers to Some Questions About Insiders.
What exactly is an Insider?
An corporate Insider is any officer
(CEO, VP, etc.), director, owner of 10% of a class of a
company's stock, or any of certain other related parties who
by law is presumed to be privy to non-public information about
a publicly-held corporation. Insiders PLUS also
considers certain stock exchange members Insiders for purposes
of overall market assessment.
Because someone running a company or a director in a board
meeting has a much better idea of what's going on there than
the general public or analysts covering the stock.
"I do look at the numbers. I don't give as much weight
to the option exercise. If you have an option that is
exercisable, you're going to have to do it whether you like
the stock or not. You may turn around and sell the stock ....
But I do like insider buying. What you try to look
for are multiple buys, that is, many officers and directors
buying, rather than one. The size of the trade is important.
The bigger the better....
It tends to be predictive for as much as a year out. It
does tend to work, and it does give you an edge...."
Marty Zweig - on Wall Street Week
with Luis Rukeyser
"The results indicate that company officials are: (a)
able to avoid significant losses and, (b) earn excess returns
from trading their company's stock."
Mississippi State University Study
"The findings of the study indicated registered
insiders appeared to possess and utilize predictive ability in
trading their company's stock."
Louisiana Tech University Study
"Insider transactions are a powerful investing tool.
As with any powerful tool, it can be dangerous in the hands of
the untrained, but extremely productive in the hands of a
knowledgeable user. I've found Insider transactions to be the
best screen for identifying potentially profitable investment
To our knowledge, Jack Adamo is
the only person to have done statistical research on Insider
Transactions by measuring stock price performance from the day
the information is filed with the SEC, instead of the day
Insiders buy or sell their stock. Until recently, there was a
lag of up to 40 days between Insider transactions and the date
on which there were required to report the transaction, it was
important to know if the information was still useful to the
investing public at the time of filing. Jack's study showed
the information was still very useful for identifying
profitable investment opportunities, as long as acted on
promptly and knowledgeably. With the filing time now greatly
reduced, the information is even more useful.
How we do it
Each business day Insiders
Plus scrutinizes an average of 645 insider transactions
filed with the SEC in Washington. The raw data is fed into our
proprietary InsideXpertTM database system where it is
corrected, compiled and organized. A preliminary rating is
calculated for each stock based on statistically determined
criteria highlighting the quantity, quality and timing of
System output is reviewed by an analyst experienced in the
interpretation of Insider transactions and the laws that apply
to them. Stocks may have their final ratings adjusted by this
Selected stocks passing all our rating
criteria are researched and analyzed, then considered for
inclusion in the Insiders Plus portfolio.
Is Insider buying always good and selling always bad?
No, and this fact can confuse even knowledgeable observers.
Because Insider transactions have received more and more
public attention over the last few years, Insider buying is
now often used by company officials as a public relations
ploy. When the company is doing badly, company officers will
often buy stock to put on a false front to investors, implying
that things are looking up.
Further complicating the matter is the large amount of option
compensation given corporate executives these days. It makes
Insider buying less necessary, and Insider selling more
prevalent and problematic to interpret. A good amount of
experience, research, and analytical skill is required to see
through these false Insider leads. Subtle clues sometimes
provide more true insight than the overt signals.
Jack Adamo periodically
features articles exposing phony Insider buying in specific
stocks, as well as pieces on how to detect specious Insider
transactions in general.
What's the difference between
legal Insider transactions and illegal "Insider
It is perfectly legal for an officer or director to buy or
sell stock in the company he or she works for, as long as the
Securities and Exchange Commission is properly notified. This
is supposed to prevent the Insider from taking unfair
advantage of non-public information.
In theory, the SEC can
"recapture" any stock gains Insiders make, or losses
they avoid, within six months prior to any major company
development that affects share prices. This recapture rule
encourages Insiders to act on developing situations at the
earliest possible moment to try to stay outside of that
six-month window. In any case, the SEC is, in my opinion, very
lax about enforcing these rules, and Insiders regularly
exploit this fact.
Illegal Insider trading occurs when parties privy to
non-public information attempt to profit from it by hiding
their transactions from the SEC. It is usually done by passing
the private information (like a pending takeover) to another
party who makes the trades for the Insider, then shares the
profits. These are the folks you see in the newsreels being
led out in handcuffs with their Armani suit jackets pulled
over their heads.