GET A QUOTE: Markets chart
Insider selling doesn't always mean bad news ahead (but it does sometimes)
Posted 5/11/2006 3:42 AM ET E-mail | Print |
Q: Would you not buy a stock if insiders were selling, even if all the other numbers and trends looked good?

A: When a CEO or other top executives of a company are selling their stock, you should pay attention.

There are many examples where the timing of top executives' stock sales were great early-warning indicators. At Enron, for instance, insiders were dumping stock before the implosion. makes it easy to track insider sales. If you go to and enter a company's name or stock symbol in the Quick Quote box, you can then click on "insider selling" and see moves by executives from their latest SEC filings.

For demonstration purposes, check out this link. It shows you insider selling and buying by executives at General Electric (GE).

Keep in mind, though, this is not a fail-safe way to make stock decisions. Monitoring insider buying and selling can be important, but it's not the only thing to consider. There are many examples where executives either sold or bought at the wrong time.

And just because executives sell stock doesn't mean there's bad news ahead. Maybe they need to raise cash so they can pay their taxes, buy a mansion or diversify their portfolio.

Sophisticated investors realize this and have turned the study of insider trading into a science. Using advanced computer models, some investors study executive trading with shocking precision. The basic idea of these computer models is that an executive's decision to buy or sell his company's stock is only meaningful if it is contrary to what he should logically do.

If a CEO, for instance, suddenly exercises stock options before their value is fully vested, that could be a giant red flag. Much of this pioneering work is based on research by Carr Bettis, professor at Arizona State University and co-founder of Gradient Analytics.

If you're serious about using insider trading as a signal for your portfolio, you need to study Bettis' work first. Be forewarned, though, this research may take intensive study to fully understand. Some of the research papers he wrote and co-wrote are available here:


The Cost of Employee Stock Options.
