Monthly Archives: December 2015

Insider Trading; Why The CEO Really Sells

For almost a decade, we worked in the “Private Corporate Client” area of an international brokerage firm. “Private Corporate Client” is just another way of saying “Insider” as a majority of our clients were insiders selling their restricted shares and companies themselves doing buybacks/repurhcases. Because of that experience, we know why insiders REALLY SELL or BUY their company’s shares. The actual reasons will probably surprise you.

We’re not talking about illegal insider trading; that is, when someone with insider (non-public) information trades a stock based on that information. We’re talking about when an officer, director, or other executive buys or sell shares.

We were the guys that would help these executives jump through the hoops they needed to so that they would be allowed to sell shares on the open market. There are quite a few hoops at that, but the most common are spelled out in SEC Rule 144 and Rule 144(k). Actual paper stock certificates are used when “restricted” shares are given to an insider and they actually are stamped “Restricted” in red on the certificate. We even had a CFO of a $Billion technology company pull up to our office, with his new speedboat being hauled behind his new SUV, to hand us a restricted stock certificate he wanted to sell that was worth several $Million. Yeah, those kind of “insiders”.

Rule 144 & Rule 144(k)

When you acquire restricted (unregistered) securities or hold control securities, you must file for an exemption from the SEC’s registration requirements to sell restricted shares – or if they are registered, you must file a public notification of the sale. Rule 144 allows public resale of restricted and control securities if a number of conditions are met. This overview tells you what you need to know about selling your restricted or control securities. It also describes how to have a restrictive legend removed.

Some of the restrictions on the sales include how long that person has held those shares, the number of shares that can be sold in a specific period of time and even how those shares can be sold by the broker.

Restricted and Control Securities

Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or start-up capital. Rule 144(a)(3) identifies what sales produce restricted securities.

Control securities can be restricted or unrestricted but are always those held by an affiliate of the issuer. An affiliate is a person, such as a Director, the CEO & CFO, or large shareholder in a relationship of control with the issuer. Control means the power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise. Most often, that means the top executives.

If you are given restricted securities because you are an insider or were a seed investor, you almost always will receive a certificate stamped with a “restricted” legend. The legend is just a stamp that indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempted from the registration requirements.

There are plenty of technical terms and other pieces of information regarding these types of sales, but that’s not important. As long as you understand the general restrictions, that’s all you need to know more than 90% of investors do.

Should I Sell When The CEO Does?

In a few words… probably not.

There are many, many reasons why an insider like a CEO or a CFO will sell some of his or her shares. Maybe he is looking to purchase a new vacation home (or payoff his new boat like our CFO friend). Or, his son or daughter is heading off to college and he needs some cash for tuition and other expenses. Or, most commonly (in our experience), the stock has made a nice run and the executive is basically looking to diversify.

We’ve seen in many times where a CEO was there at the beginning. Maybe he had plenty of money before, but he’s spent years, if not decades making the business into what it is today. During growth years, before the company became as big as it is now, that CEO may have been paid only pittance in actual cash compared to other CEOs in the same industry for those years. Instead of big paychecks, he was given restricted shares of stock as additional compensation. Doing that saved the company quite a bit of cash and gave that CEO a huge incentive to grow that company and increase the stock price. On paper, he might have $20 million in stock, but only a couple hundred thousand in actual cash or other investments from all of those years of work. If any of us were in that situation, the wise thing would be to sell at least a portion of those shares to diversify, buy an annuity, insurance, whatever. Let’s say that CEO does not sell anything, and does not plan to until well after he retires, only when he needs it. Now, he’s left and still has his $20 million in stock only. The next CEO is a crook and is caught with accounting irregularities. The stock plummets and bankruptcy is coming. The shares are now worthless. He should have sold some, no?

When an insider like a CEO sells shares (whether restricted or not), his broker needs to file a Form 144 with the SEC. The information on that form is what is made public and we all see online through financial websites like Yahoo that list insider sales. Rule 144 limits the number of shares that an insider can sell in a rolling 90 day period. The limit on the number of shares is tied to the average volume of the stock or the number of shares outstanding and varies from company to company and can even vary widely from one 90-day period to the next.

A wise broker will make ONE filing that mentions all of the shares that the CEO plans to sell in the next 90 days or less. That way, services like Yahoo Finance show just that one filing.

Many brokers have no experience with Rule 144 and make a filing each and every day that shares are sold listing just the amount sold. That’s fine as far as disclosure laws go – but now Yahoo Finance might show 25 sales over 25 days where the CEO is selling around 10,000 shares each day for each of those 25 days.

Wouldn’t it be less alarming as an investor if you saw that the CEO had just one filing for 250,000 and that was it? Psychologically, seeing 10,000 share sales over and over and over makes investors more likely to think the CEO is just cashing out and thinks the stock will drop.

So when you see smaller sales over and over and over by an executive, take a look at the history of his or her sales. It may be nothing more than a stupid broker filing each day instead of filing just once for the entire sell order.

If you see a CEO selling and those sales significantly drop the number of shares he holds, that makes even us nervous. That’s a warning sign. We are also concerned when the insider uses an idiot for a broker who files for each and every sale. That insider is either not knowledgeable enough to use someone who knows how to minimize the impact of shareholders seeing all of those filings, or doesn’t care enough to worry about the appearance of all of those sales. Shouldn’t a CEO be better than that? We think so.

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Shorting Stocks – How does it work?

You own 10 shares of company ABC at $50 per share. You believe the stock price of ABC is grossly overvalued and is going to crash sometime soon. You are so convinced that the stock will crash, you come to me, and ask to borrow my ten shares of ABC and sell them at the current market price for $50. I agree to lend you my shares as long as you pay me back ten shares of ABC at some point in the future. You take the ten borrowed shares, sell them for $500 (10 shares x $50 per share = $500).


The following week, the price of ABC stock falls to $20 per share. You call your broker and tell him to buy 10 shares of ABC stock, at the new price of $20 per share. You pay him the $200 (10 shares x $20 per share = $200). A few days later, you pick up the shares of ABC and bring them by my office. “Here are the ten shares I borrowed,” you say as you put them on my desk.


Do you see what happened? You borrowed my shares of ABC, sold them for $500. The following week, when ABC fell to $20 per share, you repurchased those ten shares for $200 and gave them back to me. In the mean time, you pocketed the difference of $300.


The Speculative Nature of Shorting Stock

What if the price of ABC stock had risen? The person shorting stock would have had to buy back the shares at the new, higher price, and absorb the loss personally. Unlike regular investing where your losses are limited to the amount of capital you invest (e.g., if you invest $100, you cannot lose more than the $100), shorting stock has no limit to the amount you might ultimately lose. Famed investor Ben Graham told us there is nothing stopping an overpriced stock from becoming more overpriced. In the unlikely event the stock had shot up to $1,000 (which actually happened to shares of Northern Pacific during a short squeeze in 1902), you would have had to purchase ten shares at $1,000 a share for $10,000. Taking into account the $500 you received from selling the shares earlier, you would have lost $9,500 on a $500 investment.


In order to begin shorting stock, you must open a margin account with your brokerage firm. You will be charged interest on the borrowed funds as well as subject to several rules and regulations that govern shorting stock (for example, you cannot short a penny stock, and before you can begin shorting a stock, the last trade must be an uptick or zero-plus tick.) After taking these factors into consideration, you will, hopefully, realize shorting stock is not a financially fattening activity in most cases and comes along with additional risks.

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Placing Stock Trades

A How-To guide to make the most of your trades


What’s a limit order? What is “buy to cover”?


Getting started in investing can be confusing. Here, we’re concerned with just placing order and executing orders in equities – stocks. If you’re at this website, you’ve probably got a basic understanding of the process. However, we’ve worked in the business for many years and have seen many people place an order and they had no idea how the trades are actually executed – or how they get a certain price.


First and foremost: If you are selling stocks, someone out there has to buy it. I remember quite well one customer who held stock options in their employer and wanted to sell that stock for their tidy little profit. They called and said they saw the price of the stock in the paper (the closing price the day before) at $48.00 and wanted to sell it there. Well, the stock was trading at that time at about $46.00 per share at that person did not understand why he couldn’t just have $48.00 like the newspaper said.


When you “execute” a trade; that is, a trade you placed was completed, you are either buying the stock from somebody who was selling it, or selling it to someone who was buying it. This ‘someone’ could be another individual investor or a broker or a market maker. The point is that when you sell, someone bought your shares. When you buy, someone sold you their shares.


How do you want to trade?

You’ve got a few options when it comes to trading stocks. Buying and selling are the obvious choices. But there are other ways to trade, too: selling short and buying to cover.


Selling short can be done when you have a margin account with your broker. Essentially, you borrow shares of a particular stock and sell them, hoping that the stock will depreciate in value, leaving the difference between the selling price and eventual repurchase price in your pocket. Buying to cover is the term for that eventual repurchase; it closes out a “short position” in a stock.


But since we’re talking about your first trade here, it makes sense to focus on buying stocks. Besides, selling short and buying to cover are more advanced investing topics that we’ll cover in a later section.


There are 5 common ways to place an order with most brokers.

1) Market Order

2) Limit Order

3) Stop Order

4) Stop-Limit Order

5) Trailing Stop-Limit Order


Market Order: A market order is a request to purchase or sell a stock at the current market price. Market orders are pretty much the standard stock purchase order. One thing to keep in mind with a market order is the fact that you don’t control how much you pay for your stock purchase or sale; the market does. You WILL get your trade executed, but at whatever price the market will have at that time.


Limit Order: This is an order that executes at a specific price that you set (or better) and can be open for a specific time period. While a limit order will prevent you from buying or selling your stock at a price that you don’t want, if the price is way off base, the order will never execute. It’s important to note that some brokers charge more for limit orders.


Stop Order: This is a market order that is triggered once your stock reaches a specific target price, the stop price. Stop orders may also be called stop-loss orders, because they help investors put constraints on their losses. In many cases, investors will have purchased a stock at $30, and it is now at $50. They will then place a Stop Order at $45. The trade will not go through – ever – unless that stock drops to $45. Then, and only then, it will be executed as a market order. Basically, this order places a “floor” on your stock price and can protect profits.


Stop-Limit Order : This is identical to the stop order, except for the fact that a limit order is triggered once your stock reaches a specific target price. For instance, you can place a stop-limit order that will trigger just like a stop-order, but will not execute unless you can get a certain price that you set.


Trailing Stop: Basically, this is a stop order based on a percentage change in the market price. The “trailing” means exactly that. The “stop-price” trails along behind the stock. For instance, let’s say you hold a $100 stocks with a 10% trailing stop. At $100, the stock would be sold if it drops to $90. However, let’s say that the stock runs up to $150. Now, the stock will be sold if it drops to $135 (10% below that highest price). We love, and recommend these types of orders as it not only protects profits, but allows the stop price to move higher if the stock does.


Duration of the order is important!


You will have to check with your broker to see exactly what they offer. However, most brokers always offer either a Day Order or a GT (Good ‘Till) order. A day order is good for that day, and that day only. If the order is not executed before the end of the day, you will have to enter it again for the next day. A GT30 order is a “Good ‘Till 30 Days” order. When you place that order, it will be good and in the system for up to 30 days, unless cancelled. After 30 days, if not executed, it is cancelled. Some will offer a GT orders “‘Till” a specific date. Perhaps you want an order Good ‘Till Friday. Most brokers will accommodate that.


If you do not mention the duration to your broker, it will be treated as a day only order.



You will need to specify the total number of stocks that you want to buy or sell. Stocks are usually traded in “round lots” (multiple of 100 stocks, for example).

With a few exceptions, a round lot represents:

100 stocks if the stock price is $1.00 or higher
500 stocks if the price is $0.10 to $0.99 each
   1,000 stocks if the price is lower than $0.10 each

An “odd lot” is acceptable on the trading floor, but it is more difficult to trade, unless it is an “at market” order with a significant volume of the security. In  many cases, you will receive a slightly lower price for a sale because of the uneven quantity.

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