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Dose of Prose

Hey Style Prose readers,

It’s currently storming where I am, which yields the perfect environment for drinking coffee, watching Hulu and writing blog posts of course. Although I’m pursuing my Masters in Finance, I wouldn’t consider myself to be a finance expert by any means, which is why I try to utilize all of the resources around me to expand my knowledge about the industry. Reading newspapers, subscribing to blogs and tuning into podcasts, has truly given me insight and understanding of current events and the world of finance.

I recently attended a trading/investing webinar that I found interesting and felt the need to share it with you…which brings me to today’s post. If you’re not interested in finance and follow my posts for fashion/lifestyle, don’t worry, check back next week and I’ll have what you’re looking for. But for those of you who are into finance, or want to learn more about it, keep reading. I think you’ll find what I’m about to say interesting.

Disclaimer: I am not a certified financial planner nor a certified financial analyst; therefore I am not licensed to give any sort of financial advice. I am neither agreeing nor disagreeing with anything stated in the webinar. I also cannot confirm nor deny that the system/methodology mentioned in the webinar is completely accurate. Anything that you invest in can have gains, but it can also have losses. There is always some amount of risk involved when trading in certain markets. Please seek professional help and conduct due diligence before you begin trading or investing. The content I am discussing is not my personal beliefs – I am simply giving a summary of what was said in a webinar, with the intention to start a productive discussion in the comments section.

I’ll try my best to put this concept into laymans terms without getting into all the technicals, because I know from personal experience how complex finance can be. Basically, this webinar talked about an investing technique that would completely change your financial wealth. The webinar showed you how to pick the #1 stocks every time, without incurring any losses. The methodology guaranteed wins on every single trade you made, with gains amounting to $100,000 in 12 months. Whether you’re a trading expert or a beginner investor, according to the webinar, you would always reap exceptional profits. You never lose.

So how does this work? What can you do to ensure you are ahead of the market and invest in the safest stocks that yield the highest gains? The concept is simple: follow insiders.

Let’s back track for a second. What is an insider? As the name indicates, insiders are people who work ‘inside’ the company. This includes the CEOs, CFOs, board members – individuals with access to key, non-public information about their companies. Additionally, a general rule to investing is to invest in what you know. Think about it. Nobody knows the true value of the company besides the people working in it, which is why insiders have the biggest advantage when it comes to trading. The information that these insiders know helps them accumulate wealth; therefore, if you follow what these insiders are doing, then you can do the same.

If I haven’t lost you yet, I’m sure the first thing that comes to your mind is the concern about the legality of all of this, meaning…this sounds a lot like insider trading. Truth be told…it is. However, the reason why this method is perfectly legal is because of a couple of SEC rules and filings that make the trading process more transparent.

SEC Rule 10b5-1, is essentially a rule established by the SEC to protect insiders, causing them to be immune from insider trading. The rule basically requires insiders to develop a written plan that states the amount, price, date and metrics used when they sell stocks that they own. When insiders trade stocks, they are immune from insider trading because of this rule.

But what does Rule 10b5-1 have to do with someone like you and me? How can we follow these insiders and mimic their trading habits? Well, thanks to Form 4, outside investors, like you and me, can see every trade that the insiders make. Form 4 is a mandatory document that must be filed by insiders (those who own 10% or more of the company) and essentially the filing details all of the buy and sell orders that insiders make. With this form, we can have an inside look at Wall Street’s top stock pickers and their strategies. We can know the story before anyone else does – we can win.

But wait…there’s more. The last SEC regulation I want to mention is the Short Swing Profit Rule. This rule basically prevents insiders from making short-term profits. Here’s a quick example: let’s say CEO of XYZ company buys 100 shares at $5 in January ($5 x 100 shares = $500) and sells these same shares in February for $6 ($6 x 100 shares = $600), he or she would have made a profit of $100 ($600 – $500 = $100). Because the shares were bought and sold within a six-month period, the officer would have to return the $100 to the company under the short-swing profit rule.

This rule, again, applies to insiders but not outside investors like you and me. Which means that we can sell our stock at any time after we buy it. This is a key factor in how we can boost our earnings when following insiders.

The last bit of information I want to touch upon is the following:

Why do insiders buy stocks?

In order to follow insiders, you have to know why they choose to trade in the first place. Insiders buy because the…

1. Stock is undervalued (selling for less than what it’s worth).

2. Company is doing well, but market doesn’t know it yet.

What to look for:

There are some distinct characteristics that signal a stock is about to take off based on insider trading. This includes –

1. High conviction trades – insiders making huge bets on trades (ie. a CEO using $2.5M of his/her personal money to buy a stock…now that’s confidence).

2. Cluster buying – multiple insiders making the same trades within days of each other.

3. First time trades – insiders buy a stock for the first time ever.

I know this was long and a lot of information, but out of all of the investing systems/methodologies I’ve been exposed to, this one stands out to me because it’s so simple and seems like something that everyone would follow, yet nobody is talking about it. Who would have thought that just by following what corporate insiders are doing, you could potentially win big on a random stocks that nobody has ever heard of before?

Obviously at the end of the webinar, the hosts ultimately were advocating for their insider report service that basically does all of the research for you by looking at insider trading reports and helping you to pick the best trades. However, in order to avoid the risk of appearing biased, I am not going to share the source of where I received this information. Again, as my disclaimer states, I am simply summarizing what I heard. Don’t shoot the messenger!

Does it really work?

Let me know your thoughts. Do you believe that ‘buying along insiders’ is a get rich quick scheme? Is this ethical? Genius? Too risky? A loophole in the SEC? Have you tried any trading systems/methodologies that work or don’t work? What are your recommendations? I would love to know. Let’s start a discussion.

I hope I rattled your brain a bit. Until next time.

-Kaamilah