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Information on Insider Trading -

Insider trading is one of my favorite indicators. Insider trading information is reported to the SEC. Investors can use this information to invest legally. Most insiders are officers with strong information and knowledge about the company's business. They often buy in large quantity.

Company officers, often have a far better understanding of how their business operates and the valuation of their company's stock. Combine this information with the fact that they invest large quantities of their own money into their own company stock and you have an unspoken vote of confidence in the stock's future performance.

Buying by high-ranking company officers is bullish for a couple of reasons. They buy stocks in their own company because they feel the stock is undervalued. Other investors will notice the favorable activity and buy some shares of their own. Also, when shares bought in large quantities and held tightly, sometimes the amount of stock available for public trading decreases. Since less stock is available for investing, demand increases and drives prices upward. Company buybacks work in a similar fashion.

Is insider selling bearish for a stock? Sometimes, but not necessarily. Company officers and large investors may sell some stock just to get cash. Nevertheless, one warning sign that a stock is overvalued is heavy and continuous selling with no buying. Look for unusually large volumes as well.

However, note that well informed officers and investors are human and often make trading mistakes too. I have seen stocks with significant corporate and institutional buying drop as much as 90% in price. Although overall, my test portfolios using this strategy have typically outperformed the markets and my other portfolios, do not forget to use other forms of analysis before building your portfolio.