Insider Trading: Legally Profiting From Insider Information

| July 28, 2011 | 0 Comments

Insider trading… it seems to be running rampant on Wall Street.

In fact, prominent hedge fund trader Raj Rajaratnam was just convicted of trading on illegal insider information in May.  The former Galleon Group Fund manager reportedly made $60 million in illegal profits through years of trading on non-public information.

Not surprisingly, the US Securities and Exchange Commission (SEC) doesn’t take insider trading lightly.  And now it looks like Raj will spend more than a few years in the slammer.  His sentencing is scheduled for September 27th.

But Raj isn’t the only one…

Martha Stewart was convicted of insider trading in 2004.  The happy homemaker sold $230,000 worth of ImClone Systems on illegal inside information in 2001.  She maintains her innocence, but did a stint in a low security West Virginia prison.

While these two cases are prominent, many Wall Street big wigs have been convicted of insider trading over the years.

Why is insider trading illegal?

Quite simply, insider trading erodes the integrity of the markets.  The average investor needs to be assured they’re competing on a level playing field.  If insiders are cheating the system, the field is clearly tipped in their favor.

But not all forms of insider trading are illegal…

In fact, there are ways you can use “insider information” to make hefty returns… legally.

How?

Executives and directors at publicly traded companies are required to disclose all stock transactions to the SEC within two days.  These SEC Form-4 reports reveal what corporate insiders are doing with their personal holdings of company stock.

That information can be very useful to investors like you and me…

For example, if a CEO buys shares of his own company, it’s a great sign the stock is a tremendous value.  After all, corporate insiders know their company best.  They’re buying their stock because they think they can eventually profit from the transaction.

And the more stock they’re buying the better…

Large insider purchases are a great sign the insider feels confident about the company’s future.  Otherwise, why would they be picking up so many shares?

Let’s take a look at a recent big insider transaction…

Robert Goergen, Chairman of the Board and CEO of Blyth (BTH) just backed up the truck.  On July 11th, he bought 400,000 shares of his own company’s stock at $52.29… a $20.9 million buy.

The CEO plopping down millions for an open market purchase is a great sign this multi-channel retailer has something going for it.

The stock is rallying hard.  Since early June, shares have surged nearly 80%.  Mr. Goergen bought his shares after the stock had already risen substantially.  That’s a good sign he’s not merely trying to time the market.

He must feel his company is exceptionally undervalued at $52.29.

And BTH isn’t the only stock with strong insider buying…

There are a number of companies with recent insider transactions deserving investor attention.  FuelCell Energy (FCEL), Navistar International (NAV), and Titanium Metals (TIE) have all seen their insiders gobble up shares recently.

Keep an eye on these stocks…

If company insiders are investing their own hard earned money, maybe you should too.

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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