Insider Selling

QAn insider at a company I’m invested in sold tens of thousands of shares. Who buys those? — C.R., Ann Arbor, Michigan

AWhen company insiders — such as owners, top executives or directors — sell some of their shares, they often do so in the open market, where any investor can buy them. If there are many more shares for sale than there are interested buyers, the price will drop until it reaches a point at which buyers will buy.

It’s reasonable to pay attention to insider buying and selling for companies of interest, but don’t overdo it: Remember that at many businesses, bigwigs get a large portion of their compensation in the form of stock, so when they need or want cash, it’s common for them to sell some — or many — shares. Some degree of insider selling is routine and a nonevent, but insider buying is generally a good sign, as it suggests that people with the deepest knowledge of the company expect their shares to rise in value.

It’s worth finding out what portion of their total shares a given insider has sold — you can look up such information at sites such as FinViz.com/insidertrading.ashx.

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QWhat are derivatives? — B.V., Richmond, California

AThey’re complex financial contracts whose value is derived from other assets or benchmarks, such as stocks, bonds, interest rates, market indexes, mortgages or currencies. They’re generally bought or sold by financial professionals to hedge risks or to gain access to particular markets. Common derivatives include futures and options.

Derivatives can be very risky and unsuitable for less experienced investors, in part because many are not regulated. Warren Buffett has called them “financial weapons of mass destruction.”

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