Insider Trading

INTRODUCTION

The term insider trading refers to the stock transactions of the officers , directors, and large shareholders of the firm .Most investors believe that the corporate insiders informed about the prospectus of their firms and that the buy and sell their own firm’s stock at the most favorable time and reap significant profits .Whether insiders are just lucky and good at predicting future stock price changes.

A related and more interesting question for the rest of us is whether it make sense for us to monitor insiders transaction? Further, is it possible for us to successfully imitate insiders ? If so, how do we imitate insiders success? should we simply mimic on all insider trading , or can we develop some strategy that can help us do even better ? Does insider trading add new insides to the usual rules of thumb investors use to judge the valuation of firms , such as past stock price performance, book to market ratios? does insider buying coupled with a high book to market ratio alone ?can we look at current insider trading patterns and improve our understanding of recent stocks price changes or dividend yields ? for instance , if stock prices have increased recently and insiders are selling is this a good time for us to sell as well ? finally does insider trading activity help us evaluate the long term impact of important corporate changes such as acquiring another firm or being acquired by another firm ? these are some of the central question we are looking for.

Insider Trading Pattern

How to treat conflicting insider trading signals , and various statistical properties of insider trading . It will digress briefly on the legal and regulatory issues surrounding insider trading . These preliminaries will help the potential stock market investor better appreciate the investment signals provided by insider trading.

In order to interpret meaning of a given set of insider transactions,, we need to understand everyday insiders characteristics . for instance, suppose that i would like to use insider trading to help guide help and guide my portfolio decisions. The first question I would ask is : How often does an insider trade occur for a typical stock ? If an insider trade occurs once every five years , then waiting for insiders to provide investing signals is not going to be very helpful. On the other hand , if an insider trade is expected to occur once every other month.

When Is Insider Trading Illegal?

Insider trading is deemed to be illegal when the material information is still non-public and this comes with harsh consequences, including both potential fines and jail time. Material nonpublic information is defined as any information that could substantially impact the stock price of that company. Obviously, being privy to such information could influence an investor’s decision to buy or sell the security which would give them an edge over the public who do not have such access. Martha Stewart’s 2001 ImClone trading is a prime example of this.

When Is Insider Trading Legal?

Legal insider trading happens in the stock market on a weekly basis. The question of legality stems from the SEC’s attempt to maintain a fair marketplace. Basically, it is legal when company insiders engage in trading company stock as long as they report these trades to the SEC in a timely manner. The Securities Exchange Act of 1934 was the first step to the legal disclosure of transactions of company stock. For example, directors and major owners of stock must disclose their stakes, transactions, and change of ownership.

Recent Insider Trading Cases

But don’t think that major penalties like the one we’ve just discussed forever deterred people from attempting this kind of machinations. Far from it. In fact, let’s take a look at the most recent examples of insider trading.

The US Justice Department has just closed their investigation into the actions of senators who engaged in large-scale trading while privy to sensitive information. All three made sizable sales shortly before the recession hit the markets due to the coronavirus pandemic.

Democratic Sen. Dianne Feinstein of California sold millions of dollars worth of stocks as a sitting member of the Senate Intelligence Committee. Fellow Senator, republican representative Kelly Loeffler, whose husband is the chairman of the New York Stock Exchange, committed a similarly suspicious trade. Loeffler dumped a large number of stocks shortly after she received a private briefing from health officials on the emerging coronavirus in January.

It’s worth noting that Senators are specifically barred from using non-public information to make decisions about stock trades under the 2012 STOCK Act. The Justice Department investigated both cases but ultimately declined to press charges for insider trading as both Senators claimed other parties (family members and advisors) made trades on their behalf.

Meanwhile in Brazil, Marcos Molina — the CEO of a major local meatpacker Marfrig — is facing accusations of insider trading from the country’s securities regulator — CVM. CVM discovered that Molina bought Marfrig shares prior to the public announcement of a deal with Leucadia National Corp to take a 51% stake in National Beef. Marfrig’s shares rose nearly 20% after the transaction was announced.

Insider Trading vs. Insider Information

Insider trading  is knowledge of material related to a publicly-traded company that provides an unfair advantage to the trader or investor. For example, say the vice president of a technology company’s engineering department overhears a meeting between the CEO and the CFO.

Two weeks before the company releases its earnings, the CFO discloses to the CEO that the company did not meet its sales expectations and lost money over the past quarter. The vice president of the engineering department knows their friend owns shares of the company and warns the friend to sell their shares right away and look to open a short position. This is an example of insider information because earnings have not been released to the public.

Suppose the vice president’s friend then sells their shares and shorts 1,000 shares of the stock before the earnings are released. Now it is illegal insider trading. However, if they trade the security after the earnings are released, it is not considered illegal because they do not have a direct advantage over other traders or investors.

REFERANCE :

INVESTMENT INTELLIGENCE FROM INDISER TRADING (BY HASAN NEJAT SEYHUM)

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