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Insiders

Corporate insiders are the company's top officers, directors, and large shareholders who own 10% or more of the company. These insiders know the firm's prospects better than any analyst or money manager could. They know whether inventory is being depleted or is building up. They know what new products are coming out and how their competitors are reacting. They know everything we wish we knew. Although we might not believe what these insiders say about their firms, we should take notice of their actions. Specifically, insiders must report to the Securities and Exchange Commission the buying and selling of their shares of firm.

Indeed, it is a common belief that insiders have better knowledge of the firm and frequently use that knowledge to better time their trading. It is also commonly believed that an investor can mimic the trades of insiders and also earn high returns. Indeed, a cottage industry has developed to follow insider trades. Every week, The Wall Street Journal highlights insider trades in its “Insider Trading Spotlight” column. This information is also printed in the weekly Barron's, the institutional investor service Insider Trading Monitor, and a newsletter targeted to individual investors called Insiders' Chronicle.


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