According to Investopedia, insider trading is “The buying or selling of a security by someone who has access to material, nonpublic information about the security.” Insiders are those in the company that have access to current information that the general public and including most employees, do not have access to. This information would usually be privy to those in upper management, such as Presidents, CEO’s, CFO’s, VP’s, Directors, etc.
As an insider, these people would obviously have an advantage over the rest of the public when it comes to trading stock in their own company. They are allowed to trade but they must report any trades in their own company to the SEC. Illegal insider trading is when trading occurs on information in their possession that is not available to the general public. It is also considered illegal to tip friends, family, or others with this same information. If you received such information and traded on it, you would be guilty of insider trading as well.
The reporting of trades that insiders make to the SEC becomes public information. This information is updated daily and can be accessed for free on websites such as http://finviz.com/. When accessing any company on this site, the bottom of the page lists insider trading for that security.
The thing we have to realize is that insider selling is a normal occurrence. This happens due to the fact that insiders typically receive some of their compensation in the form of stock or options. Insiders will often sell the stock given to them or exercise options and then sell the stock. The concern on insider selling would be if multiple individuals are selling, and they are selling most, or all, of their holdings. Beware of any security when this type of selling occurs. When insiders trade, they also report the number of shares they still have after the trade occurs. A sale of 50,000 shares may seem like a lot, but not if the insider still has 750,000 shares in their possession.
Insider buying, on the other hand, is not as frequent. Any insider buying is considered a good sign for the company, especially if multiple individuals are buying. Any insider buying by one whose position is listed as 10% ownership, would also be considered a good sign.
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