FAQ

1. Who are insiders?
The term "insider" includes CEO's, CFO's, and other participants that have access to material information about the company and who can influence the direction of the firm. In addition, generally anybody or organization that owns or has claims on 10% or more of a company's equity is also an insider and must file insider trading reports (there are some exceptions in Canada).

2. Is insider trading legal?
Company insiders have the right to buy and sell securities in their own firm so long as they are complying with securities laws and rules. This means, for example, that they cannot trade in their own securities when they are in possession of "material" non-public information, such as a pending take-over bid.

3. What are insider trading reports?
Securities regulators generally require corporate insiders of publicly listed companies to report the details of all their buys and sells of company securities within 2 days of a transaction. In Canada, insiders usually have 5 days to file. Insider reports are filed electronically with the SEC in the US or with securities administrators in Canada.

Insiders must report transactions done both on and off stock exchanges in any securities issued by a reporting issuer or in derivatives that result in a claim on securities issued by the company. So, the requirements cover not only stocks, but also warrants, options and other derivatives.

4. I can't find a company or filing on your system, why not?
There may be some companies or insiders that do not show up on our system. While each case is different, one of the most common reasons for not being able to find an entry is that we cannot track companies or insiders that do not file electronically. If a company has just listed, it may be a while before it has its first insider reports.

5. If a company is inter-listed in that it trades in both the US and Canada, where will the insider file trading reports?
For company insiders, they will normally file in the country where their company is reporting. Each circumstance can be different. In some cases, reports may be filed in both countries.

6. Why do investors use insider tracking?
Academic studies using US data suggest that corporate insiders may earn above normal profits on their trades (For example, see Lakonishok and Lee, "Are Insider Trades Informative?" The Review of Financial Studies, spring 2001). The findings suggest that company insiders, as a group, may be better informed than the average investor about the prospects for their respective firms. Other US studies (see FAQ#7) have found at insider buying tends to provide better information than insider selling. Please keep in mind, however, there is no guarantee that results will be repeated in the future.

7. Where can I read more about insider trading and stock returns?
Books
  • Moreland, Jonathan. Profit From Legal Insider Trading. Dearborn Financial Publishing, 2000.
  • Seyhun, H. Nejat. Investing Intelligence from Insider Trading. The MIT Press, 1998.
  • Taulli, Tom. "Chapter 11." The Edgar ® Online Guide to Decoding Financial Statements. J.Ross Publishing.
Articles
  • Beneish, M.D. and Vargus, Mark E. "Insider Trading, Earnings Quality and Accrual Mispricing." The Accounting Review (October 2002): 755-791.
  • Cohen, L., Malloy, C. and Pomorski, L. "Decoding Inside Information". (October 2010). Available at NBER.
  • Lakonishok, J. and Lee, F. "Are Insider Trades Informative?" The Review of Financial Studies (spring 2001).
  • Miller, Edward M. "Investment Intelligence from Insider Trading." The Journal of Social, Political and Economic Studies (winter 1999): 477-484.
  • Purnanandam, Amiyatosh K. and Seyhun, Hasan Nejat. "Shorts and Insiders." (July 30, 2007). Available at SSRN.
  • Scott, J. and Xu, P. "Some Insider Sales Are Positive Signals." The Financial Analysts Journal (May/June 2004): 45-51. Available at CFA Institute.
  • Tartaroglu, Semih. "Insider Trading During the Technology Bubble." (February 2009). Available at SSRN.

New research is being produced all the time. Investors may want to periodically search the Social Science Research Network data base at www.ssrn.com

8. Should I simply do what the insiders do?
While we believe insider activity can be an important screen and a potential indicator of a company's prospects, it is usually used in conjunction with other indicators. It is important to keep in mind that academic research has shown that following insider buying signals in isolation can result in holding stocks with both losses and gains. In the past, a few "big wins" among stocks with insider buying has been shown to compensate for the inevitable number of stocks that still go down despite insider buying. It is best to use insider trading data to identify potentially profitable trading ideas by incorporating insider signals into an overall diversified portfolio strategy and due diligence process. Insider signals can be used by either contrarian (value) or momentum (growth) investors. For an overview, please see our Investing Style guide at the INK Research website