Education

Introduction

What is Insider Trading?

Insider trading is the trading of a public company's stock or securities by anyone with access to market moving nonpublic information about the company. This could be the CEO or other corporate officers, but may also include front line employees and contractors. Insider trading may also include trades by individuals who received stock tips from insiders with nonpublic information.

Is Insider Trading Illegal?

Insider trading is usually portrayed negatively in the media. However, not all insider trading is illegal. It is only when the trade is based on material (market moving) information not in the public domain that it becomes illegal (Seyhun 1998). Insiders who are officers, directors, or shareholders owning 10% or more of a public company's stock are required to report trades they make in their company to the SEC. Reporting is required within 2 business days from when the trade was made, and becomes a public record once it has been reported to the SEC.

How Investors Can Use Insider Transaction Data

All publicly available insider trading data can be found at the SEC's website. However, the data provided by the SEC is highly unprocessed. There are also no query tools to find things such as which companies or sector had the largest purchases, or which companies have purchases from multiple insiders for a given time period. The SEC also includes insider transactions that would not be helpful to an investor such as purchases or sales that didn't occur on the open market, or stock that was acquired from a will.

Investors are told they should follow the smart money. Corporate insiders are the smartest money to be found when researching any specific company. Insiders have deeper knowledge of the operations and future prospects for their company than any outsider could hope to achieve (Lakonishok, Lee, 2001). When an insider trades on the open market they use their knowledge of developments in their own firm, their industry, and the economy at large and put their own money at risk. Thus insider transaction data can provide a forward looking indicator of sentiment for the smartest money around. Individual investors don't have access to the insights of corporate insiders. However, what insiders know can be inferred from their open market trading activity.

What Insider Sleuth Offers

Insider Sleuth maintains a database of all form 4 open market non-derivative insider transactions reported to the SEC. Our data is updated in real time, and we provide a suite of tools to explore this data. These tools include charts to compare insider buying and selling activity to stock price, an in depth data screener, and the ability to receive email notifications the moment insider trades are reported.

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