TIPS FROM INSIDERS

When corporate insiders buy or sell, it can offer clues on whether you should do the same.

- KIM CLARK

WHEN the stock market is hitting new highs and traditional valuation measures sit above their historical averages, investors seeking opportunities may feel stumped. That's a good time to look at what the "smart money" is buying.

One group of smarties: corporate insiders-board members and executives, as well as shareholders who own more than 10% of the company, who likely know more about their business than anybody else. "Investors should pay attention to insider buying and selling because insiders have intimate knowledge of their company's operations and an information advantage," says Ben Silverman, director of research at data firm Verity, an investment research and data services firm.

Of course, trading on information material to the business that hasn't been made public is illegal.

(Those kinds of trades caused trouble for Martha Stewart and Ivan Boesky.) And insiders who fail to report any purchase or sale of their company stock (including the number of shares and prices they paid) to the Securities and Exchange Commission within two business days are breaking the law, too. But not all insider trading is illegal, and Silverman says certain kinds of insider transactions have been good predictors of above-average returns in a stock. In other words, as part of a process to analyze a potential investment, it can pay to understand insider trading and how best to use the data to choose stocks.

To reduce the likelihood that insiders are acting on secret information, most companies allow their insiders to buy or sell stock only during certain periods (windows) per year. Those periods typically start a few days after a quarterly earnings report or other major announcement, and they end a week or two before the next expected announcement. Insiders can also set up an automatic plan for trades that, for example, might sell a preset number of shares or execute stock options on the same date each month-inside or outside of a company's window.