Inside track on insider trading

Posted: February 21, 2013

Q: I saw that some insiders at a company recently sold several million shares of its stock. When insiders sell so many shares, who are the buyers?

- F.A., Decatur, Ill.

A: Shares sold by insiders such as officers, directors or owners of a company are sold in the market, where for every seller there's usually a buyer. The catch: If there are many more shares for sale than there are interested buyers, the price will drop - until it reaches a point at which buyers will buy.

Several million shares might seem like a lot, but in a typical trading day many companies experience a high volume of trading. In recent months, Best Buy's average daily volume was about 10 million shares. For General Electric, it was more like 43 million.

It's smart to examine insider purchases and sales for companies that interest you. Occasional selling is routine, because many insiders get a lot of their compensation in the form of stock and have to sell shares to generate cash. One or more insiders unloading a large portion of their shares can be a red flag, but insider buying is generally a bullish sign. You can look up insider transactions at insidertrade.net.

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