Insider trading – a hint for individual investor

Insider trading – a hint for individual investor
Who else knows much better about a public company than its internal stakeholders? They are the one who are better positioned to assess the underlying business of a firm. As an individual investor, we should take a clue in assessing the company’s fair value from the insider’s prospective. The best way is to track these internal stakeholders act of buying and selling the equity shares in the open market. Such transactions are termed as ‘Insider trading’ by SEBI. If such hint had been taken a year back in ‘Satyam Computers’, investors would have saved their capital well in advance. Remember, Mr. Raju’s family was regularly selling off their stake in the name of pledging! What can be a better example than this! This is on the flip side of the whole concept. On the other hand, investors can also take hint when the insiders buying their own company’s stock. Let us look into some of the important concepts of insider trading.
Who is an insider for a company?
According to SEBI guidelines, “insider” means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of company, or who has received or has had access to such unpublished price sensitive information. It also defined ‘connected person’. They are-
• Director of the company
• an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company

By the definition of SEBI, ‘insider’ also includes largest shareholder/s who holds substantial ownership (more than 5%) in the company. They include institutional investors and promoters.
When the transactions will be reported?
Any transaction by them has to be reported by the company within 5 days of receipts of such information to the stock exchanges
Source: http://www.sebi.gov.in/acts/act081.pdf
How exactly to track an insider trading for successful investment?
Watch out for promoters, executive managers and largest shareholders trading activities. It is better to ignore small transactions. Also it is advisable to check the history of such insider’s transaction and align the same with the price movement of that particular stock. If he or she is buying when the price is going down, it should give a green signal to investors. However, the investor should not blindly buy at such instance. He should do an elaborate analysis on grounds such as financials, management, business and industry. Once he convinced on these angles, investor can go ahead to invest for a long term. On the contrary, if insiders sell, it should raise a red flag like in the case of Satyam Computers.

he case of Satyam Computers.