Tips From Insider Selling

Insider buying either bodes well for the stock or is a neutral event at worst. Insider stock buying is rarely a negative event. But how about insider selling? When an insider sells his stock, the event can either be neutral or negative. Insider selling is usually a little tougher to figure out because insiders may have many different motivations to sell stock that have nothing to do with the company’s future prospects.

Just because the president of the company is selling 5,000 shares from his personal portfolio, that doesn’t necessarily mean you should sell, too. Insiders may sell their stock for a couple reasons -

_They may think that the company won’t be doing well in the near future, a negative sign for you,

_Or they may simply need the money for a variety of personal reasons that have nothing to do with the company’s potential.

Some typical reasons why insiders may sell stock include the following:

_To diversify their holdings. If an insider’s portfolio is heavily weighted with one company’s stock, a financial advisor may suggest that he balance his portfolio by selling some of that company’s stock and purchasing other securities.

_To finance personal emergencies. Sometimes an insider needs money for medical, legal, or family reasons.

_To buy a home or make another major purchase. An insider may need the money to make a down payment or perhaps to buy something outright without having to take out a loan.

How do you find out about the details regarding insider stock selling?

Although insiders must report their pertinent stock sales and purchases to the SEC, the information isn’t always revealing. As a general rule, consider the following questions when analyzing insider selling:

_How many insiders are selling? If only one insider is selling, that single transaction doesn’t give you enough information to act on. However, if many insiders are selling, you should see a red flag. Check out any news or information that is currently available.

_Are the sales showing a pattern or unusual activity? If one insider sold some stock last month, that sale alone isn’t that significant an event. However, if ten insiders have each made multiple sales in the past few months, those sales are cause for concern. See whether any new developments at the company are potentially negative. If massive insider selling has recently occurred and you don’t know why, consider putting a stop-loss order on your stock immediately.

_How much stock is being sold? If a CEO sells 5,000 shares of stock but still retains 100,000 shares, that’s not a big deal. But if the CEO sells all or most of his holdings, that’s a possible negative. Check to see whether other company executives have also sold stock.

_Do outside events or analyst reports seem coincidental with the sale of the stock? Sometimes, an influential analyst may issue a report warning about a company’s prospects. If the company’s management pooh-poohs the report but most of them are bailing out anyway (selling their stock), you may want to do the same.

Frequently, when insiders know that damaging information is forthcoming, they sell the stock before it takes a dip. Similarly, if the company’s management issues positive public statements or reports that are contradictory to their own behavior (they’re selling their stock holdings), the SEC may investigate to see whether the company is doing anything that may require a penalty. The SEC regularly tracks insider sales.