Insider Trading - The Legal Kind
by Charles B. Carlson, CFA
Dow Theory Forecasts
Contrary to what you may have been led to believe as a result of the Enron coverage, it is legal for corporate executives, board members, and other "insiders" to buy and sell shares of their company stock.
And with the Internet, it has never been easier to track the buying and selling of corporate executives. One especially useful Web site for tracking insider trading is the popular Yahoo Finance site. At this site, just plug in a stock symbol near the top of the page. You'll be taken to a page that displays your company's stock symbol and a variety of links, including "insider." If you click on the "insider" link, you'll be taken to a page showing insider-trading activity over the last several months.
When evaluating insider trading, keep in mind that insider buying tends to carry greater weight than insider selling. Indeed, corporate executives may sell stock for a variety of reasons - diversification, estate planning, major purchases, etc. On the other hand, given that a corporate insider has the ability to buy any stock, the fact that he or she chooses his/her own company stock could speak volumes about their perception that the stock offers great value.
Another important point to consider when evaluating insider trading activity is the quantity of buyers/sellers. For example, if one corporate executive is selling stock, that probably isn't as meaningful as 10 corporate insiders selling stock. Likewise, if four different insiders are buying, that should carry greater weight than a lone buyer.
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