While market-beating strategies come and go, one has stood the test of time. If executives, directors, or those with inside knowledge of a public company are buying or selling stock, investors should pay close attention to their activities to know whether they should consider doing the same.
Expert investors may argue that keeping an eye on a company’s insiders’ buying and selling practices is an important part of doing your homework before investing. Outsiders must consider the factors that influence the timing of trades as well as the factors that obscure the motivations of insiders before pursuing each insider move. Tracking insider stock ownership changes is a good indicator for new investors on when to buy or sell stocks. Here are a few things an investor should know when insiders buy or sell their company shares.
- As company insiders begin to buy stock, it may be a sign for outside investors to follow suit, but it’s important to look at the insiders who are doing so. Insiders can sell their stock for a variety of reasons, but they only buy it for one—they believe the price will increase. Any insider purchase is a good sign, but when a large number of insiders make transactions, it becomes even more important. “The more the merrier” is a safe concept to use when determining insider purchases.
- Before it becomes public knowledge, insiders usually have a clear understanding of what’s going on at a business. As a result, they can act on that knowledge by purchasing and selling stock in the same business. These insiders are well ahead of analysts, fund managers, as well as individual investors, in terms of cyclical dynamics, prices, and other primary ingredients of business performance. Insiders’ decisions to trade in their own companies’ stocks are definitely worth investigating.
- Insider ownership of a company’s stock is usually indicative of trust in the company’s prospects and ownership of its stock. Insiders and institutions are smart, conscientious, and sophisticated investors, so their ownership is a strong criterion for a preliminary screening or a credible confirmation of your stock analysis. It pays to keep an eye on insider activity. They’re probably right if they believe their stock is about to grow or fall.
- Insiders often do not sell because they believe their company’s stock is about to fall in value, even though they bought it because they expect good things to happen. Insiders sell for a variety of motives. They may want to diversify their holdings, sell stock to buyers, or go on a well-deserved vacation. The data from the sale and purchase of shares by company investors can help in developing your own buying and selling system.
- Take note of the purchase’s timing. Insider stock buys must also be made at the right time. If several insiders bought different amounts of shares at different times of the year, then that would not be a good enough signal to buy stocks. However, if you find out that some insiders bought large amounts of shares at the same time, that is most likely a signal to make a purchase.
- It’s crucial to know who to keep an eye on among the insiders. Look for behavior clusters involving many insiders. If a company has several instances of related insider trading in a short period of time, it’s a sign of insider consensus. The most telling trading behavior comes from top executives with the most in-depth knowledge of the business, so keep an eye out for CEOs and CFOs.
- Visit the investor relations website for more information. An investor relations site will be available for any corporation that requires individual shareholders to buy company stock. You should look at confidential documents here, such as stock split history and written agreements relating to corporate finance.
Insider transactions and sales have proven to be reasonably accurate predictors of future stock results over time. Insiders have access to critical information that the general public does not, so it makes sense to keep an eye on how they treat their own stock. Although not completely reliable, studies show that company insiders have a strong track record when it comes to buying and selling their own stock.