According to a study that was reported by the Fiscal Times, the odds of randomly purchasing a stock option that profitably coincides with an unannounced merger or acquisition is three in one trillion. Don’t ask me how they come up with numbers like these, but there you have it. The reality of it, interestingly enough, is that many successful trades resembling this sort of execution actually suggest some model of informed trading because it is more common than statistics should have them.
Informed trading is otherwise known as insider trading. If you are making trades based on information that is not available to the general public, you are insider trading. It does make sense to have rules to manage this sort of danger, because as we know, there is a great deal of manipulation that goes on in the stock market and not having some form of protection for the retail investor could be devastating.
Those who trade “on the inside,” in many cases are making millions of dollars doing it. The worry of course, is that insiders make their money at the expense of retail investors.
The study was done by examining 1,800 deals from January 1996 through the end of 2012. It showed that there was actual evidence for insider trading involved in 25% of the cases. It also pointed out that it was more likely to happen when cash offers are on the table because these tend to be more of a “sure thing.”
Now, as far as those three in a trillion statistics are concerned, that is ridiculously understating the facts. Obviously when you trade with education, you are going to position yourself to be invested in stocks that are likely to acquire and merge and prove to be a profitable trade regardless of having any insider knowledge. So your odds go through the roof when you research which is the flip side argument as to why the numbers are significantly better than three in a trillion.
Just like in court when a subject gets discussed and then the judge asks for this topic to be taken from the record. The jury can agree not to use something as evidence against or for something, but they cannot “un-hear” what was said. Chances are, the things that were said and removed from the records are still influences that affect a jury’s decisions going forward.
Inevitably, classified information that gets discussed is going to have an influence on your trades or lack thereof with a company. Imagine if you owned a stock that you were planning to sell and you heard some “good” information regarding the company; this information of course being ‘insider information’. This might actually influence your “non-decision” or cause your “non-trade.”
I’m not advocating for traditional illegal insider trading and there are definitely some clear boundaries that you should not cross, but just like in a courtroom, there are events that happen on grey lines that definitely impact trading outcomes.
Many people get caught up worrying about insider trading and high frequency trading for that matter. All I can say is, “be the insider” rather than the complainer. Be the one that is informed and educated when you make a stock purchase that you feel is going to do well. It’s not about trying to get into classified information to trade with, but be in front of the classified information. Use the numbers and trajectory of the company to simply anticipate the best news that inevitably will assist you with trading the classified news that has not yet been released.
Honestly, it’s the closest thing you could do next to breaking the law to profit from the positive moves a company is making, is to make educated informed decisions and purchase quality companies.
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Chief Editor at CrushTheStreet.com