Investing in Stocks For Dummies
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Insider stock buying is rarely negative for an investor — it either bodes well for the stock or is a neutral event at worst. But how about insider selling? When an insider sells his stock, the event can be either neutral or negative.

Insider selling is usually a little tougher than insider buying 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 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 she balance her 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’s currently available by going to websites such as MarketWatch, U.S. Securities and Exchange Commission, and Yahoo! Finance.

  • 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, 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 contradict 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).

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