Make Insider Trading Work For You — Without Going To Jail

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Billionaires go to jail for it. Money managers have fled the country and faked suicides when it’s suggested. Hedge funds have paid billions in fines and been harassed by the Securities and Exchange Commission (SEC) on little more than a hint of its occurrence.

Most recently, celebrity investor and high-tech titan Mark Cuban fought and secured a courtroom victory when accused of violating this regulation. Famed entrepreneur and TV personality Martha Stewart wasn’t as fortunate as Cuban — she spent time behind bars in 2004 for what amounted to be a relatively small amount of money.

The strangest thing is, this action is considered a legitimate edge in the commodity markets. It’s only in the stock market where it’s considered a mortal sin.

If you haven’t guessed, I am talking about insider trading.

Insider trading offers an unfair advantage to those with the information and capacity to profit from it. It is the desire to level the playing field that motivates the authorities to clamp down on insider trading. It truly is the most powerful edge available in the stock market, hence its illegal status.

While non-public insider trading is illegal, there is a way to capture some of this edge for yourself without worrying about SEC wiretaps and a guilty conscience.

Raj Rajaratnam thinking

Company insiders are required by law to make their stock transactions public. This information is readily available online. There are several websites that compile this information, but my favorite (and one of the most widely used) is Yahoo Finance.

To find this information, first plug in the stock symbol on the Yahoo Finance’s ticker lookup field. When the company’s information page has loaded, find the “Ownership” section near the bottom of the blue rail on the left side of the page. Here you will find the major holders, insider transactions and the insider roster. The insider transaction section will show insiders who are selling and/or buying shares. Look for a substantial tilt on the buy or sell side by insiders to gain an overall perspective.

Remember, insiders can sell shares for any reason. However, large relative amounts, a sudden shift from a being a consistent buyer to a seller or vice versa, or a preponderance of buyers/sellers can signal something is going on that has not yet made the news.

In my experience, insider purchases are more telling than insider sales. In general, one only purchases with the desire to make a profit. Selling can be a signal of bad news around the corner or it can simply be a monetary need of the seller. It’s not possible to tell the difference on an individual basis.

It is this insider information that can tip off investors to pending trouble or bullish stock news. For those interested in more detailed information on insider activity, InsiderInsights.com is the website I find most helpful, and Morningstar.com has a very thorough section on current insider transactions.

The following are three stocks that appear to be sending signals of insider activity.

1. The Home Depot, Inc. (NYSE:HD)

Director Mark Vadon recently purchased 10,000 shares for $752,000. This is on top of a 5,000-share purchase last December for $318,500. He paid $63.70 per share last December compared with $75.20 in September. I see this as a serious vote of bullish confidence.

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