How to Trade Based on Inside Information — Legally

It's illegal to trade on nonpublic inside information. So, would it surprise you if I told you there's a way to trade that's almost as solid but 100% legal?

 

Gordon Gekko is the name of the character Michael Douglas plays in Oliver Stone’s 1987 movie Wall Street.

Gekko is a corporate raider … and a star on Wall Street. He buys companies, picks them apart and sells the assets at a profit.

He also buys and sells stocks. But his trades are different from yours and mine.

You see, he’s as ruthless as he is unscrupulous. He stops at nothing to get information on which he could trade.

When he meets Charlie Sheen’s character, Bud Fox, he finds a young, impressionable stockbroker willing to track down insider trading information. And he’d go anywhere to get it.

Fox spies on a fellow raider of Gekko’s to determine his next move. He pays people for their nonpublic information – illegal insider trading. And he even breaks into an attorney’s office to learn about merger and acquisition deals in the pipeline.

Of course, it is illegal to trade on that information. It’s called insider trading.

So, would it surprise you if I told you there is a way to trade based on insider information that is almost as solid as the above, but 100% legal?

Defining Our Next Steps

According to the Securities and Exchange Commission (SEC):

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security

That is exactly what Gekko and Fox were doing.

I want to tell you about another type of trading. It is effective and smart.

And — unlike Gekko’s process — it is 100% legal.

Insider Trading Is Regulated

Legal insider trading is pretty much a regulated activity. And it’s one that we can benefit from.

To make sure we’re on the same page … the SEC says insiders are officers, directors and those who hold 10% of any class of a company’s securities.

These purchases they make are also known as open-market buys. They aren’t the result of option grants or restricted stock issuances.

There are a lot of forms the insiders have to file with the SEC. The SEC requires it so they can track these activities.

For example, the SEC requires that insiders must file a Form 4 with information about the shares they bought within 48 hours of making the trade.

This is mainly to ensure that people with inside information are not trading in advance of releasing the news to the public.

The beauty of these filings is we can track what insiders are doing. If insiders are buying up a lot of a name you like, you may want to consider buying, too.

How to Follow Insider Trades

If this makes sense to you, you can follow insider activity yourself.

Insider trading filings are available on the SEC’s website.

Simply enter the name or ticker symbol of the company you are researching.

Then, toward the top left of the next screen, click on “Get insider transactions for this issuer.”

That will take you to a screen that lists the company insiders. The site shows the insider(s) with the most recent trades first.

If you click on the number in the “Filings” column next to the insider you’re interested in, you can see his or her recent activity.

This can be a useful — and lucrative — place to visit to confirm you’re going down the right path with a potential stock investment.

 

Good investing,

Brian Christopher

Editor, Insider Profit Trader

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