How To Profit By Using “Insider Trading” Information

What is the difference between gambling and investing? Some people might tell you that they are synonymous but one is usually illegal (unless you go through the government) and the other is perfectly legal.

One is a wild guess while the other is supposedly an educated one. Unless, of course, you’re buying a stock purely because your “friend” told you that it is a lobang. But lobangs from “friends” might actually get you into trouble. What kind of lobang is that, then? Illegal insider trading.

Before anything, insider trading is actually legal, provided you don’t break certain strict rules. So the case above is actually one where trades were made based on information that is not made public.

But in this article, we are exploring perfectly legal ways of utilising insider trading information to help us in our trading decisions. Simply because we are going to look at ways of getting public “insider” information that anyone can access at any time on the Singapore Exchange (SGX) website.

Insider Trading Basics

Other than the bosses, directors and top management of a company, individuals who are deemed to own more than five percent of a company’s shares are also considered an insider.

Whenever these insiders make any ‘buy’ or ‘sell’ transactions of the company’s stock, they are required to disclose to SGX within two business days and these are typically found on SGX’s website (as shown above).

So as long you make the trades/investments based on such public information, you are definitely safe from legal implications. We can find such information on the company’s Investor Relations web page and other information aggregation services too.

How Insider Trading Information is Useful to Retail Investors

Peter Lynch, a legendary fund manager, once said, “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

If anything, the best person to ask about how a company is doing is its top management. But instead of asking them directly, we can look at what they’re doing with the company’s stocks – are they buying or selling?

Another way to look at it, why would a boss or a top management team buy their own company’s stocks if they think the price is going to fall? Of course, this is not a 100-percent sure way of knowing how well a company is going to do in the future.

Nevertheless, it is a good gauge of how well the masterminds of a company think of its future and potential growth – they know their own business the best, almost surely better than average retail investors like us.

Insider Trading Information Works Best During Market Downturns

When the market is bad, or when a stock market crash occurs, most retail investors’ first instinct is to get out of the market as soon as possible. But if we see the boss, top management, and insiders aggressively buying stocks of a particular company, shouldn’t we be wondering why?

Most of the time, insiders buy loads of stocks during market downturns because prices are hit and that’s when bargains can be found. So when the market is bad,instead of rushing for the exits, turn back and see if the leaders are still in the room.

Likewise, if the top management and substantial shareholders are aggressively selling their stock holdings, look at the information available to us. That might be a signal of pessimism. After all, we wouldn’t want to be staying in the room if the leaders are bailing.

Conclusion

Illegal insider trading can make us a lot of money in a very short time. But it is definitely not worth the jail time and time lost with our family. The thing is, legal insider trading can reap decent profits too but that shouldn’t be our only reason to buy a particular stock.

But always remember, we must keep our eyes peeled if the leaders of a business are either aggressively buying or selling its stocks – remember the logic about seeing if the leaders are in or out of the room.

We should still do our due homework and research on strong companies that could be trading below their intrinsic value. Finding out a company’s intrinsic value is a whole different animal altogether and there are many different ways to do it.

If you’re interested in learning more…

To learn more, wealth coach Adam Khoo will be holding a free three-hour workshop and interested investors and traders are encouraged to sit in. Adam will be covering some basics about how to value a stock, like finding out the intrinsic value of a company.

Click on the button below to learn more about the free workshop and reserve your seats now!