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Should You Listen To A Corporate Insider?

There are few people more knowledgeable about a particular company’s stock than its “corporate insiders.” These are usually key officers such as chairmen, chief executive officers, directors, and presidents of publicly traded companies.

When they buy or sell their company’s stock, the transactions are published on financial Web sites and in financial newspapers like Barron’s or the Wall Street Journal. There, you can find things such as:
  • The date and size of any transactions
  • The price they paid or received
  • The insiders and their positions in the company

Money managers and individual investors take an interest in this data. That’s because no one knows the business, its level of performance, and its future prospects better than the insiders do.

It is important to note that these transactions should not be confused with the act of illegally trading securities based on insider information, or tips. When insiders legally trade their own stock, they must file a form with the Securities and Exchange Commission (SEC). The SEC, which monitors and reports corporate insider trading activity, has stringent rules about how much stock insiders can buy or sell, and when they can do so.

When insiders buy, Wall Street assumes it’s because the insiders think their stock is currently undervalued, but expect it to rise soon and create profit. It’s usually seen as a sign of confidence.

That doesn’t mean that when insiders sell, they think their company is going to nosedive. There are many reasons for insiders to sell. They may need cash to fund their retirement, pay their taxes, send their kids to school, or buy a home just as everyone else does.

But you shouldn’t buy or sell your stock just because the CEO did. Instead, take it as a reminder to review the company’s fundamentals and direction, and talk to us about whether it still belongs in your portfolio.