A corporate insider is either a senior officer, director, or an above 10% equity owner. Once classified as a corporate insider, one must adhere to very strict disclosure regulations required by the Securities and Exchange Commission (SEC).
When insiders buy or sell shares in their own companies, they must submit a form 4 to the SEC, which states their position and change in equity. The form must be submitted by the end of the second business day following the change in ownership. Once the form is processed it is uploaded and accessible to the public through the SEC’s EDGAR database.
TipRanks’ financial engine specializes in collecting and analyzing this data. Not only can you find all corporate insider transactions, you can also view the specific performance of each insider making these transactions.
Perhaps the most important factor in analyzing these transactions is separating the uninformative transactions (which account for about 80%), from the informative ones. These uninformative transactions include employee stock grants, scheduled sell-offs, and timed purchases. From the remaining informative transactions one can significantly outperform the market; however, this is often more difficult than investors expect.
Globally renowned investor Peter Lynch said, "There are many reasons insiders sell, but only one reason insiders buy". The statement explains that an insider could sell because he/she needs cash or wants to put some money in other investments and diversify risk; however, he will only buy more stock when he believes it will increase in value.
At TipRanks we researched over 1.5 Million of these insider transactions to design the DailyInsider, a powerful day trading strategy based on what insiders buy and sell.
Note: This kind of insider trading should not be confused with the illegal form of insider trading, which refers to an individual or firm buying/selling stock based on non-public information.