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Here are a few items on insiders.

Q. Is it true that when a company goes public and first issues shares to the public, its insiders can't sell their shares for a certain period of time? Why is this? -- S. G., Tampa, Fla.

A. This is called the lock-up period. It typically runs for 90 to 360 days and offers outside investors some measure of protection. If the newly-public firm has some skeletons in its closet, those insiders who know about them can't act on them, quickly selling their shares before the public learns the bad news. Some companies set extra long lock-up periods, to show their faith in the company and inspire confidence in public shareholders.


The Fool School
Insider Selling: Omen of Doom?

Oh no! You're a shareholder in Gilded Lily Emporiums (GLILY), a company that blah blah blahs, and their CEO Frederick Oiker has filed to sell 20,000 of his shares of company stock! It's insider selling -- does it mean that Gilded Lily is in trouble? Does Fred know something the rest of us don't know? Should we all sell our shares of GLILY?

An un-Foolish investor might worry about this, thinking that it's a bad sign. But the truth is that insider selling isn't necessarily something to fret about. Let's think about why Fred might be selling.

Maybe he really does think the company is in trouble. Or maybe he believes another investment holds better promise. Or possibly he just needs the money -- en route to buying a house, paying for his son Oswald's college education, or bidding at Christie's for that Theodore Roosevelt's gold-edged ashtray.

Another reason that many executives sell their shares is that stock options are the major component of their compensation package. This is particularly true at upstart technology companies. Some of these managers have worked for the company for a long time and have been fed stock options by the board instead of big salaries. In many cases, they have most of their wealth tied up in stock, without much moolah lying around. For them, cashing in some options is a fairly routine thing to do.

Executives sell for a variety of reasons. If you see an insider selling shares, it doesn't necessarily mean the company is going down in flames. There's always a chance that the insider does know some bad news, but it's just as likely that he simply needed some cash. You should definitely take a look at how many shares she is selling relative to her total ownership position. In fact, insider-sale reports should include that statistic!

Insider buying is a much better sign for you, Fool. After all, managers don't buy shares of stock unless they're believers. But next time someone shouts that insiders are selling a stock you own, don't jump ship without doing a little research first.

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