Insider trading is when corporate insiders (officers, directors, and employees) buy and sell stock in their own companies. This data is available on a timely basis thanks to rules the SEC adopted per the provisions of the Sarbanes-Oxley Act of 2002. Changes in ownership, reported on Form 4, must be reported to the SEC within two business days. We’ll narrow our definition of corporate insiders as senior management and directors for tracking purposes.
Insiders may sell stock for reasons having nothing to do with future results. For instance, insiders may sell their stocks in an attempt to better diversify their holdings and because of personal liquidity needs. Insider buying is much easier to understand. To quote Peter Lynch,
“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
The question is when insiders’ trade should investors follow?
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