Corporate executives at public companies are allowed to buy and sell stock in their own company—but they are not allowed to buy and sell stock in their own company based on nonpublic information (information that they would know, but that the average investor would not). That would be insider trading, which is illegal. So why do executives seem to do far better than average when trading their own company's stock? HMMM.
The WSJ has an excellent investigation into this topic today, and I encourage you to read it in full in order to marvel at just how closely they place the dots to one another, while politely allowing you, the reader, to connect them yourself. The crux of their findings:
Among 20,237 executives who traded their own company's stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much. Most executives have a mix of trades, some that look good in retrospect and others that do not.
The Journal also compared the trading of corporate executives who buy and sell their own companies' stock irregularly, dipping in and out, against executives who follow a consistent yearly pattern in their trading. It found that the former were much likelier to record quick gains.
So, corporate executives are twice as likely to record big gains as they are to record big losses immediately after trading their own stock; and corporate executives who trade their own stock only when they want to are much more likely to do very well.
Far be it from us to say that this is clearly indicative of a pattern of widespread insider trading and that many corporate executives should be jailed for ripping off their investors. We will just say that many corporate executives should be jailed, in general.