Legal Insider Trading: What Every Investor Should Look For in a Company

Legal Insider Trading

Executives of a company usually hold an unfair advantage when it comes to buying and selling stock in their own companies. When a CEO, for example, purchases shares of the company he or she runs based on information they obtained recently, it is known as insider buying. Insider selling refers to when an employee of a company sells shares of the company that he or she works in. Insider buying and selling can be very risky since there is a very thin line that separates what is illegal and what is legal insider trading today.

For an executive looking to purchase or dispose of shares of their own company, there are some guidelines to ensure that the trade is done under the law and doesn’t cause an unfair advantage over other investors. 

Legal Insider trading is permissible as long as it follows the SEC’s regulations. If an executive wants to genuinely purchase or sell the shares of their own company, he/she is free to do so, provided the Legal Insider Trading is not carried out around important company events, such as an announcement of a merger or dismissal of a top executive. These events may affect the prices of shares. Trading with prior knowledge of these occurrences is considered illegal insider trading.

What should a shareholder watch out for in a company they own stock in?

If you are an investor, knowledge of what stocks in the stock market you invest in is important for your decision-making. If you already own shares in a company, you should be vigilant for any news on how the company is doing. Here are some things you need to watch out for:

1. The financial statements of the company

Holding shares of a company means that you own part of the company. Therefore, you are entitled to see the financial statements and reports of the company to determine how it is performing. Going through the company’s balance sheets and profit and loss accounts is mandatory before making further investments with the company. This information is important as it will help you decide whether your investment in the company is bearing fruits or not. 

If the company is making profits, you may decide to increase the number of shares you own, and if it is performing poorly, you may want to sell your shares to prevent incurring huge losses.

2. The debt position of the company

It is also crucial to assess how much debt the corporation has to determine its stability and whether it can survive an economic downturn. A company with too much debt means it cannot sustain its daily operations in the event of an economic crisis, such as a global pandemic. Therefore, if the company is borrowing a lot of money, that is a red flag, which means to pull out before it is too late. On the other hand, a company that is in good standing and has little or no debt shows a lot of promise in case of an economic crisis. If it can repay the debt’s installments and still make a profit, then it is worth investing in.

3. The future plans of the company

Before making a long-term investment with a company as a shareholder, you need to be able to understand what the company’s visions are and whether it has provisions for its future. Apart from its financial statements, you need to be able to see clearly where the company is headed, and whether its plans and decisions for the future are reasonable. Being able to compare the growth of the company over a period of time is also key in decision making.

4. Any threats to the company’s financial position

This is critical for any shareholder to take note of as soon as it starts. Looming threats may include signs such as aimless spending by the company, increasing debts, risky decision-making that may affect the company’s current goals. The company must remain honest with all the choices they make that may affect its solvency, and as a shareholder, it is up to you to decide how you act upon that information. 

You should also look to ensure that the shareholder’s agreement is upheld, with regards to the dissemination of information by the company. The shareholder’s agreement entails all the rights that a shareholder is entitled to by the company they own stock in.

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