If you have followed the trials and tribulations of Martha Stewart, you know that buying or selling stock with inside information is a no-no. However, money reporter Stacy Johnson recently bought a stock based on what the insiders did.
Martha Stewart got into some hot water by allegedly using inside information when she decided to dump a stock a few months back. Trading on inside information is not legal because you are not supposed to know non-public information about public companies. However, it is legal to do the next best thing.
Namely, see what the insiders who have inside information are doing with their own money. Nothing secret about that, cause if corporate bigwigs buy or sell there companies stock they have to tell. In addition, that can be useful.
Let me give you a real life example. It is no secret that airline stocks have been losing altitude for quite a while now. So a couple of months ago, I was thinking of hopping aboard American. When I was looking at it, the stock was about nine, lower than it had been in a decade. Cool.
There was a reason the stock was falling. Business was bad, US Air had just declared bankruptcy, and UAL was thinking about it. Was American going to do the same?
I checked out insider transactions. Back in May, Thomas Horton, American's chief financial officer, bought 5,000 shares of American at 20. He must not think American is on the brink or bankruptcy, and he is certainly in a position to know. Now he could be wrong, of course. But that insider trade gave me just enough guts to put a little of my money along side his.
Bottom line? When the CEO of a public company calls, you might want to let the machine pick up. However, there is nothing wrong with seeing what insiders are up to.
Stacy bought American at $8.40 cents on Aug. 15. He reminds you, however, that he is not suggesting you buy American Airlines or any other stock. And to always invest time before you invest money.