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Look for insider open market transactions

Most individuals buy and sell their stocks in the open market. They find the bid and asked price for the shares and execute their trades in the open market. But insiders have numerous other methods for acquiring or disposing of shares such as private placement, exercise of options. Some of the transactions are not in the open market and therefore aren't registered in the trading volume and other statistics. This is just common sense that if insider can buy their company's shares at certain percent below the market value directly from the company without paying commissions and trading costs, they can still make a nice profit even if the stock price moves only sideways over the next year. Such an advantage obviously influences insiders' risk/reward calculations and their decision of whether to buy.
 
Therefore, when insiders buy their company's shares in the open market, they have to make the same risk/reward calculations individual investors do. They must figure in the trading costs of paying commissions and buying at their stock's ask price. A decision that buying shares on the open market is worth the risk even with these costs is a much stronger signal to us.
 
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Do you know you can use the filtering feature in Research Tools to look for open market transaction only?   
 

Option-related trades are not too significant

When an insider does exercise options, he or she sometimes exercises and sells several lots within time frame, one of the reasons is the insider may not have enough money to exercise all the options at once. If an insider's share are trading in the open market for $15 and the insider has options to buy 20,000 shares of stock from the company for $10, he or she has $100,000 risk-free capital gain coming out but must still pay up $200,000 to the company to get that profit. That's a fair amount of money to have on hand. The insider may choose to exercise only 5,000 options at first, and then use the profit from the sale to exercise more options and continue doing that until all the options have been cashed in.
 
Exercising options piecemeal like this can make for a pretty messy insider history for a stock with lots of selling. It would be wrong if you had viewed this as a negative indicator of the stock's future prospects. An exception is when an insider's options are getting ready to expire, the insiders might exercise them but not sell the stock immediately, and this is a valid positive signal.
Do you know you can use the filtering feature in Research Tools to remove all option related trade?   
 

How to handle unny Data?/h1> By funny data we refer to trades in which some aspect of the data don't appear to make sense. Transaction prices may be below the stock's trading range for the day and sometimes even for the year. Perhaps the number of shares traded by insiders is more than was recorded in the open market o that day. The price of the transaction may be missing as well. Most common errors are:
 
Submitting a form twice to the SEC
 
Filing in the transaction price incorrectly
 
Submitting a form with an incorrect transaction code
 
Submitting an option-related trade as an open market transaction
 
Most of the data errors are created by insiders themselves or by people who fill out the SEC forms for them. Even lawyers who are paid well to do this paperwork for busy executives sometimes make mistakes. Don't get confused with unny Data? just move on and research other company. If you really interested to particular company and found funny insider data, you may company's investor relations department for more information.

Do you know you can use the filtering feature in Research Tools to remove most of the funny data?   
 

Purchases are easier to interpret than sales

There are many reasons for insiders to sell. They may need money to buy a new cat or house, or to send a kid to college. For some founding executives, the stock holding in the company they helped build may represent the vast majority of their net worth. In such cases it's just prudent for them to diversify assets. Therefore, it is usually more open-mark sales filed with the SEC than open-market purchase. In a contrast, there is usually just one reason executives buy shares in their company in the open market: They think the price will rise.
 
The major flag for identifying stocks to avoid and possible sell short is insiders selling after their company's shares have already declined substantially. This is a strong negative signal.
Do you know you can use the filtering feature in Research Tools to look for open market "Buy" transaction only?   
 

Look for big trades and check for holding percentage change

Common sense will tell you that the more money insiders are trading the more significant the transaction. When a company catches your attention, it is a good idea to start your research with the larger transaction value first. The importance of the relative size of an insider's purchase should not be downplayed in favour of the actual dollar value of the trade. Most insiders are not chairmen with multi-million-dollar bonuses. The average vice president and chief financial officer at a company may make a comfortable living, but for many a $10,000 trade is serious money. The transaction value may look puny beside all the others you see on a given day, but it doesn't mean it's not significant.
 
It should put as much meaning in the 5,000-share purchase of a vice president if it doubles his total holding compare to a 50,000-share purchase by a chairman who has million shares as a result of the trade. The vice president's investment many very well represent a larger share of his net worth.
Do you know you can use the Research Tools compare the aggregated total trade amount and holding changes of each company insider?   
 

Follow the HANDS-ON insiders

It is better to focus on transactions by insiders with a hands-on role in the company. Trades by chairman, president or chief executive officer, vice president, chief financial officer, or any C-Level officer should be give credence. Though directors generally lack day-to-day responsibility, their transactions are also useful to analyze because of their access to information about the company's financial condition and strategy.
 
Academic studies have determined that the insider activity of CEO, vice presidents, and directors is more profitable to follow than that of beneficial owners. Keep on applying common sense when judging the relative importance of trades made by hands-on insiders; a director who is also a C-Level officer is probably in a better position to judge his company's prospects than a plain outsider director.
 
The best case is the insider being a director, a C-Level officer, and a beneficial owner of more than 10% of a class of the company's equity securities. Not only is that guy (the "First Class Insider") well positioned to judge both the strategy and operations of his company, he also has enough riding on the stock's performance to really pay attention to both.
Do you know the Research Tools categorizes all insider trade data by Director, C-Level Officer, 10% Shareholders ,and "First Class Insider"?   
 

Follow the LONG-TIME Insiders

It is important to know the trading history of an insider when judging the relative significance of insider trading signal. This rule applies particularly to new directors and C-Level officers. Insiders with long trading history are more significant than insiders will short trading history. Try to get a hold of an insider history than has at least a few years of data and try to find the date for the insider had come an insider. A useful method is to look at the total holdings of the insider after the trade. If the recent purchase accounts for all the insider's holdings, it may be the insider's first transaction.
Do you know you can find holding summary chart for selected insider in the Research Tools?   
 

Look for DIRECT ownership

Direct/indirect ownership is a straightforward concept. Direct ownership means that the shares are actually registered under the insider's name. Generally speaking, insider trades of direct holdings are more significant than indirect ones. This is simply a nod to the common sense that individuals are more likely to practice more discretion when the result hits them directly in pocketbook. By contrast, when an indirect trade involves a partnership or corporate entity, the stock's rise or fall affects the insider's financial position much less.
 
An exception to this rule is the indirect ownership is via the insider's spouse or a child's trust fund; it is difficult to argue that the insider would practices less discretion than if it were his own account. I call to the firm's investor relations department for more details on the relationship usually makes it very clear whether we should view it as significant.
Do you know you can use the Research Tools to search for Direct Ownership insider trade transactions?   
 

Look for group trades

It is always more significant to see a group of insiders trading within a short period. Insiders are only human and, as such, can be wrong. So activity that indicates there is a consensus among a few insiders about their company's prospects is a strong signal. Common sense that the odds of two, three, four, or more insiders being wrong are much less than the odds with just a single insider.
 
You might think it unlikely that four or five insiders would call their stockbrokers in the same week, but you'd be surprised. It is actually a pretty common phenomenon. Corporate governance also acts to group insider transactions. To prevent lawsuits by shareholders, most trading on non-public information, the compliance procedures of man companies allow insiders to trade only during certain windows. These time windows generally follow the release of such important news as quarterly earnings, new contracts, merger and acquisition activity.
Do you know the Research Tools has a feature that displays insider group trades in a dynamic stock price chart?   
 

Be aware of BAD group trades

If you see numerous insiders bought the same number of shares on the same day at the same price, the purchase were probably not open market. It is highly unlikely that all there officers called their stockbrokers and ended with the same exact trades.
 
Sometimes clusters of transactions are obviously AD?and show that all the insiders bought add lots of shares, sometimes at price outside of the stock's trading range for the day or even year. The number of shares the group insiders traded may also be more than the total trading volume of the shares on the day. If you come across BAD group trades when looking for new investment, just move on to the next company. If this activity occurs in a company you own, you should probably give the company's investor relations department a call for a quick explanation.
Do you know you can use the Research Tools to filter out BAD group trades by setting specific price range?   
 
References/Sources: Investment Intelligence from Insider TRading, H. Nejat Seyhun; Profit From Legal Insider Trading, Jonathan Moreland
Insiders.hk provides insider trade data to [Yahoo.com] and [Quamnet.com].
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