TheRiskBlog

Very often while coaching, a customer asks me what to do with insider information. I personally think that a lot of people go the wrong path when trading off of insider information.
Here is what i do:

• When an insider is selling shares, you never know why he/she is doing it. He/She might need money for a new house, a new car, a divorce or anything else that requires a great deal of money. So when selling i tend to look for a lot of insiders of the same company selling their shares. If that happens i might be able to use that information. If it is only a single person involved in selling shares i tend to ignore it.
• When an insider is buying shares we are dealing with a whole different story. When he is buying he is actually using his money to buy in. Unless it is an option directed deal we should pay attention, since this could be an interesting opportunity. Shares don´t tend to just rise up after the deal, it usually takes a while.

For example read the short notice over at Streetinsider about the CEO of Las Vegas Sands buying nearly 8 million shares. The trend for that stock has been nothing else than down, but here we have somebody to put his own money on the line and lots of it (at least for the average guy).

It is interesting because there are concerns about their debt situation. The company took on a lot of debt to expand operations overseas. I don´t want to go into details, if you want to read more on the issue you can do so over at Yahoo News

This is just a single story, that can be used but how do you find useful information about insiders? There are a couple of interesting websites out there where you can find all kinds of information about insiders.

What is interesting is that we have a cheap stock with an opportunity.

Here comes the Riskmanagement part:

• We do have a cheap stock and somebody buys a lot of it. Do we know his intentions? No we don´t. It could be anything from thinking the stock might go up to securing the company by buying in using own money to pure speculation
• Such information is useless for me unless it helps reducing risk when investing in this stock. Does it do that? Yes, since somebody else is buying a lot and this information is disclosed.
• So i still need to figure out the correct position size for my account by using the volatility and dividing the daily volatility of the stock by my accepted loss for the day, this will then give me the correct position size for my account.

This is just a single story, that can be used to invest your money but how do you find useful information about insiders in general? There are a couple of interesting websites out there where you can find all kinds of information about insiders.

Here are a few of them:

A very useful site where you gain information about insiders and their actions is Streetinsider 13D Tracker

One of the best sites available is NASDAQ where you will find timely information about the SEC Database. This site has a drawdown in that you have to punch in the symbol of the stock you want to know about, so you only get information one stock at a time.

A better way to gain more information in a single request is Guru Focus. These guys go a little further and track most of the famous money managers. They provide lots of information about these guys and there trading and they have a forum where you can gain valuable information.

Using insider information is a good way to make some money in the market but you have to be very careful in what you use.