3 Secrets to Successful Insider Trading

What REALLY happens when an insider buys stock?

I'm talking about insider "trading". This is the legal kind, when insiders buy and sell company shares.

There are a lot of different reasons that may influence why an insider is buying and if you should be following their lead.

But how do you figure out what is a good insider "buy" and if you should be jumping in?

The key is in the secret signals.

The Insiders Will Send Signals

Investors who want to get in on insider trading can simply buy what the insiders are buying.

There are plenty of lists for "insider buys" put out every week. But those lists don’t really tell you the full story. It’s simply a bunch of names and numbers of shares.

What's the REAL story behind the buy?

I’ve managed the Insider Trader service at Zacks for 9 months and have reviewed hundreds of insider buys in that period. The insiders often give out secret signals, but you have to know what to look for.

Here are 3 of the secret signals that I use to find the diamonds in the rough of the insider trades. Find these secret signals and insider buying will no longer seem like a mystery.

3 Secret Signals to Successful Insider Trading

1) "The Lawyer Indicator"

The General Counsel (or "Senior Counsel" at some companies) is the company's top lawyer and is considered part of management. Being a lawyer myself, I can tell you that lawyers are, in general, risk averse. (Sorry lawyers!)

Therefore, when it comes to buying company stock, they usually err on the side of caution. They rarely buy shares on the open market unless they're seeing something that is really great at their company.

If you see the General Counsel buying, that is a strong secret signal. I call it "the lawyer indicator". Buy when the lawyers are buying.

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Big Insider Trading Opportunity

Recently, at a southwestern holding company, six insiders engineered the largest single mass personal buying in several years. Even their top lawyer is putting up his own money.

This triggered a potent Zacks strategy that more than TRIPLED the gains of even our #1 Strong Buys. Tests show that, even during the Great Recession, such gains reached double digits.

This company is still a recommended "buy," and more are expected as earnings season rolls on. Exceptional demand closed the strategy to new investors last September, but it has temporarily re-opened to you.

See insider stocks today >>

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2) Buy When There Are Cluster Trades

The insider buys that get the most publicity are the famous CEOs who buy, for example, $1 million worth of shares (or more) in one massive buy.

While these big buys are great, and can mean something exciting is going on at the company, I look for the complete opposite. I look for the "cluster" trades, where a group of insiders are all buying at the same time.

That means, for example, there may be 3 Directors, the General Counsel and the President of China Operations all buying smaller amounts of shares but all deciding to do so around the same time. This type of cluster buying is rarer than the one big buy by the CEO and sends a powerful signal.

What do they ALL know?

3) Buy If Insiders Are Jumping In for the First Time

There are some insiders who buy company shares on the open market several times a year. Some of the senior insiders, like the CEO and CFO, are usually paid at a higher level than the other senior management and buying company shares isn’t much of a hardship.

But for other senior management lower down the chain, like the General Counsel or the head of Human Resources, among others, there may be a different calculation when deciding to buy that $10,000 worth of stock.

It's not unusual to see insiders who have NOT bought shares in many years, if ever.

The insider who has NEVER bought shares before, but is now buying, sends a strong signal.

I'm not talking about someone who is new at the company. This would be an insider who has worked at the company for several years and only now has decided to buy shares.

What does that insider know that is different from the prior years? Why is he buying right now?

How to Find the Best Insider Trades

The easiest way is to let our Zacks Insider Trader strategy do it for you. Insiders must report their substantial transactions within 48 hours and the service generates a buy signal when the trade meets our criteria. During a test period that spanned 3½ years, including the last recession, such stocks tripled even Zacks #1 Rank Strong Buys. Extreme demand forced us to close this strategy to new investors but it has re-opened this week. It's scheduled to close again Sunday, February 5, so I suggest you look into it now.

Learn more about Insider Trader.

Best,

Tracey Ryniec

Tracey is Zacks' value strategist and is the Editor in Charge of our Insider Trader.

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