Insider Facts and FAQs

Here are the Answers to Some Questions About Insiders.

What exactly is an Insider?

An corporate Insider is any officer (CEO, VP, etc.),  director, owner of 10% of a class of a company's stock, or any of certain other related parties who by law is presumed to be privy to non-public information about a publicly-held corporation. Insiders PLUS also considers certain stock exchange members Insiders for purposes of overall market assessment.

Why are Insiders important?

Because someone running a company or a director in a board meeting has a much better idea of what's going on there than the general public or analysts covering the stock.

What do the Experts say about Insider transactions?

"I do look at the numbers. I don't give as much weight to the option exercise. If you have an option that is exercisable, you're going to have to do it whether you like the stock or not. You may turn around and sell the stock ....

But I do like insider buying. What you  try to look for are multiple buys, that is, many officers and directors buying, rather than one. The size of the trade is important. The bigger the better....

It tends to be predictive for as much as a year out. It does tend to work, and it does give you an edge...."

Marty Zweig - on Wall Street Week  with Luis Rukeyser 

"The results indicate that company officials are: (a) able to avoid significant losses and, (b) earn excess returns from trading their company's stock."

Mississippi State University Study

"The findings of the study indicated registered insiders appeared to possess and utilize predictive ability in trading their company's stock."

Louisiana Tech University Study

"Insider transactions are a powerful investing tool. As with any powerful tool, it can be dangerous in the hands of the untrained, but extremely productive in the hands of a knowledgeable user. I've found Insider transactions to be the best screen for identifying potentially profitable investment opportunities."

Jack Adamo

What is the Insiders Plus unique Advantage?

To our knowledge, Jack Adamo is the only person to have done statistical research on Insider Transactions by measuring stock price performance from the day the information is filed with the SEC, instead of the day Insiders buy or sell their stock. Until recently, there was a lag of up to 40 days between Insider transactions and the date on which there were required to report the transaction, it was important to know if the information was still useful to the investing public at the time of filing. Jack's study showed the information was still very useful for identifying profitable investment opportunities, as long as acted on promptly and knowledgeably. With the filing time now greatly reduced, the information is even more useful.

How we do it

Each business day Insiders Plus scrutinizes an average of 645 insider transactions filed with the SEC in Washington. The raw data is fed into our proprietary InsideXpertTM database system where it is corrected, compiled and organized. A preliminary rating is calculated for each stock based on statistically determined criteria highlighting the quantity, quality and timing of insider transactions.

System output is reviewed by an analyst experienced in the interpretation of Insider transactions and the laws that apply to them. Stocks may have their final ratings adjusted by this review process.

Selected stocks passing all our rating criteria are researched and analyzed, then considered for inclusion in the Insiders Plus portfolio.

Is Insider buying always good and selling always bad?

No, and this fact can confuse even knowledgeable observers.

Because Insider transactions have received more and more public attention over the last few years, Insider buying is now often used by company officials as a public relations ploy. When the company is doing badly, company officers will often buy stock to put on a false front to investors, implying that things are looking up. 

Further complicating the matter is the large amount of option compensation given corporate executives these days. It makes Insider buying less necessary, and Insider selling more prevalent and problematic to interpret. A good amount of experience, research, and analytical skill is required to see through these false Insider leads. Subtle clues sometimes provide more true insight than the overt signals.

Jack Adamo periodically features articles exposing phony Insider buying in specific stocks, as well as pieces on how to detect specious Insider transactions in general.

What's the difference between legal Insider transactions and illegal "Insider trading?"

It is perfectly legal for an officer or director to buy or sell stock in the company he or she works for, as long as the Securities and Exchange Commission is properly notified. This is supposed to prevent the Insider from taking unfair advantage of non-public information.

In theory, the SEC can "recapture" any stock gains Insiders make, or losses they avoid, within six months prior to any major company development that affects share prices. This recapture rule encourages Insiders to act on developing situations at the earliest possible moment to try to stay outside of that six-month window. In any case, the SEC is, in my opinion, very lax about enforcing these rules, and Insiders regularly exploit this fact.

Illegal Insider trading occurs when parties privy to non-public information attempt to profit from it by hiding their transactions from the SEC. It is usually done by passing the private information (like a pending takeover) to another party who makes the trades for the Insider, then shares the profits. These are the folks you see in the newsreels being led out in handcuffs with their Armani suit jackets pulled over their heads.



Copyright 2008 by Jack Adamo. All rights reserved.