Note: this article, written in 1999, refers to features on sites no longer available
In every company, there are always a few people who know what’s going to happen before it happens. Maybe sales on a hot new product are taking off, or conversely, the sales force isn’t meeting quota, or costs are spiraling out of control and profits are going down the drain.
is inside information.
That’s what insiders do. They buy stock when they think it’s going up—and they sell if it’s going down. It’s legal if they follow the rules. One of those rules says they have to report their trades to the Securities and Exchange Commission (SEC).
Once reported, the information is public knowledge, and these days anything public finds its way onto the Web. Insider trading information is available, in differing formats, on a variety of sites. I’ll show you two of my favorites.
I picked three companies to use as examples: Russell Corporation, a textile manufacturer located in Alabama, Conseco, Inc., a Carmel, Indiana based insurance company, and Verity, Inc., a Silicon Valley software company.
Guide for a Quick Look
We’ll start with Russell Corporation. Type Russell’s ticker symbol (RML) into the Search For box on the left, near the top of Market Guide’s home page. You can enter the company name if you don’t know the symbol, just be sure to select Name above the entry box.
From the Snapshot view, click on Performance on the menu on the left, and scroll past Price Performance to Insider Trading. Market Guide tells us how many buy and sell transactions took place in the past six months and the number of shares traded. They even add up the numbers for us, so we can see the "net" of buys minus sells. When I looked last week, Market Guide showed a net of 12 insider trades, all buys. The net of purchases less sales was 12,000 (0.012 million) shares. Therefore, I learned that 12 Russell insiders purchased an average of 1,000 shares each.
Stay on the Performance page and type Conseco’s ticker symbol, CNC, into the Search For box. When I did, I saw 16 insider buys and no sells, not much different from Russell. But here is what was different; the purchases totaled 3,088 million shares! I used my calculator to figure out that the 16 insiders, on average, bought 193,000 shares each. That is serious buying!
Next, use ticker symbol VRTY to display the insider trading history for Verity. Here is a different story. Market Guide showed nine insider sales and no purchases, for a net of minus nine trades totaling 272,000 shares. Again, I used my calculator to deduce that the nine insiders, on average, sold 30,222 shares each.
So far, we’ve learned that in recent months, insiders did major buying at Conseco, considerable selling at Verity, and token buying at Russell. That’s interesting, but I wouldn’t act on the information before looking at the insider trading in more detail.
We’ll look at Russell first by typing its symbol (RML) into the Get Quotes & Research box near the top-right corner on Quicken’s home page, and then selecting Insider Trading from the menu on the left.
Quicken shows us all reported insider trades going back 13 months. We can see the name and title of each insider making a trade, the trade date, action (type of trade), number of shares, the trade share price, and more.
The Action column includes trade types: buy, sale, and exercise. Buys and sales are trades on the open market. Exercise means the insider purchased shares by exercising a stock option.
Another entry you’ll often see in the Action column is Planned Sale, a notice of intent to sell required by the SEC under certain conditions. The planned sale notice by itself is not a trade. Sometimes the insider doesn’t end up selling all, or any, of the shares specified in the planned sale notice. Not all insider sales are preceded by a planned sale notice.
Getting back to Russell, you see that quite a few insiders bought relatively small numbers of shares on the open market in recent months. You can hone in on the transactions for each insider by clicking on their name. By doing that, you'll also see any insider trading that person has done at other companies.
You’ll probably notice inconsistencies in names and titles because the information comes from the report they filed with the SEC. Sometimes the same person will list a different title on different reports, for instance, "Chief Executive Officer" on one report, and simply "officer" on another. Sometimes they’ll spell out their full name, and other times use initials.
Let’s move on to Conseco by typing its ticker symbol (CNC) into the entry box above the insider trades list. Here’s a surprise! I expected most of the trades would be exercises of options at a fraction of the current share price. Instead, officers and directors are buying hundreds of thousands of shares at current market prices. Many of the trades amounted to several million dollars. There’s a message here folks.
Finally, let’s look at Verity (VRTY). When I looked, the first 11 entries were planned sale notices, most for substantial amounts, by officers and directors. But don’t jump to conclusions. Maybe they are planning to sell shares they will be receiving by exercising options. It is common practice, especially in technology companies, to reward employees with lucrative stock options in lieu of higher salaries. The employees consider the options part of their salary, and as a matter of course, sell the stock the same day they exercise the option.
That’s exactly what you’ll see if you scan down past the planned sale notices: a series of sales and exercises, on the same date, and for the same number of shares. I think you’ll find it interesting to compare the option exercise price to the corresponding sale price.
When I looked again on 11/21/99, I noticed two of the planned sales had turned
into actual sales. These sales were not related to exercise of options.
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