Insider Trading explained

By JimPortside

October 15th, 2024

BURLINGTON, ON

 

The stock market is often called a voting machine. Some studies show at least 1 in 3 Canadians trade stocks. With an estimated 41,288,599 people living in Canada, well over 13 million people are voting.

When enough people vote for; that is buy a stock, the laws of supply and demand dictate that the price goes up. We all know that when people are selling the price goes down. Realize that OMERS, CPP, and all the other retirement funds and money managers are also voting.

We outsiders, as individual investors are also voters.

Does insider trading data help individual investors vote for a winner?

Let’s start with where Insider Trading data comes from and whether we can trust the data.

The source of the Insider Trading data is the System for Electronic Disclosure by Insiders –  www.sedi.ca – Canada’s on-line, browser-based service for filing and viewing insider reports as required by various provincial securities rules and regulations.

The following information is from https://www.securities-administrators.ca/about/

“Canadian Securities Administrators (CSA) is the umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets

The reporting of insider trading serves two important investing functions:

It provides transparency and information to the market about the trading activity of directors, senior officers or significant shareholders of reporting issuers.

It deters insider trading on confidential information, since insiders know that they will be required to disclose their trades.”

Ok, insiders are required to disclose their trades, SEDI is an umbrella group for various provincial securities regulators. Now we know where the data comes from.

Do we trust the data? This is where things get complicated.

Let’s create a fictional company we will call  FicCO and assume we are all insiders.

FicCO insiders know that if they start buying FicCO stock, they have to report the purchases on SEDI, where outsiders will see insiders buying stock and will consider joining the party. After all, insiders have the clearest view of a great earnings report, a new product in development, someone kicking tires on a takeover, the potential demise of a competitor –  you name it, if anyone knows, the insiders know.

The fact that insiders know that others review their purchases may skew the reasons they purchase stock. Maybe FicCo’s CEO gets a bonus if the stock price hits a certain value. The stock price is not there, so he or she can make and report some large insider purchases, this may induce others to buy the stock, driving up the price. If the CEO doesn’t want to hold FicCo stock for the long term, they can sell small amounts over time, in a way that does not trigger an outsider to review their position in FicCo and also sell.

Another example is FicCo insiders know a great earnings report is on the way, a group of insiders sell large blocks over a day or two, triggering others to sell, then slowly buy back the shares over a few weeks, in a way that does not trigger others to buy.

I’m not saying any company does any of this, I’m just saying the possibility exists. In a perfect world insider buying should indicate it is safe for individual investors to buy. If only we lived in a perfect world.

More on Insider Trading to follow:

A description of the algorithm used to report the top five published in the Burlington Gazette

Some specific examples of how Insider Trading was used

Some study results that show how following insider trading works

Jim has lived in Burlington for much of his life and has watched the city change and grow over the years. With over 1,000 people working for the city there is a lot going on. As a now retired, successful business owner, Jim is interested in exploring and sharing some of what our local government is working on. You can reach Jim by emailing Jim.Portside@gmail.com

 

 

 

 

 

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