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As I mentioned in the last article, insider trading information can be useful but it can also be overstated or over-relied on. Used prudently, it may alert you to increased risk in stocks you already own and could even be used to find stocks and options to add to a watchlist as a potential investment.
I suggest that insider trading information be used in two ways.
1. Monitoring insider sentiment in stocks you own.
If insiders are suddenly buying a stock you own it may indicate that there is some very positive sentiment inside the company. That may change your risk control behavior by encouraging you to leave the position uncovered or to add to the position within your portfolio. Before making a decision based on insider trading you should consider who is buying and how much they are acquiring.
For example, if an officer like the CFO is buying that may be much more relevant than a director. Similarly, if an officer or director is buying very large quantities of stock that may be something that deserves attention. The stock YHOO experienced significant insider buying by Carl Icahn in his effort to increase his strategic influence on the company’s management in late November of 2008. The stock (YHOO) has rallied since.
2. Using insider buying to find stocks for investment.
The filtering process to find stocks that you do not already own with high insider buying is daunting if it could not be automated. Fortunately there are both free and pay services that do an excellent job at filtering and reporting the data for you. In the video, I will cover three services that I recommend for this kind of research.
Insider buying should not be the only qualification you use to decide on a company to buy. It is merely an alert that something interesting might ! be happe ning. Doing fundamental analysis and making sure a potential investment conforms to your portfolio diversification strategy is still critical.
This is part two of a series on insider trading. You can find the first article and video here.
John Jagerson is a contributor to LearningMarkets.com. To learn more about him, read his bio here.
This article originally appeared on the Learning Markets Web site.
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