Insider Buying — what you need to know
So who is an Insider?
Well, it’s pretty simple. An insider is someone who has sensitive information that is not available to the public. An insider can buy into a company for whatever reason, however, if this is done to a certain extent, and at a certain time, then this can come across as illegal.
Insider trading is only illegal however, if the individual in question seeks to achieve an unfair advantage. Financial markets are in theory meant to promote a level playing field, where anyone has an equal opportunity to make money on the stock market. However, we must note that management and some individuals have information that is not public. This puts them in a privileged position to better understand in what direction a company is going, and how near-term events will impact the share prices.
The SEC and other financial bodies have frameworks that must be abided by, otherwise could land people serious fines, or even jail time. In fact, in order for insider trading to be considered legal, the person must be employed by the company that s/he is buying shares in, and that the share purchases are executed in a small window of time when there is no material non-public information available, that may impact a buyer or sellers decisions. All insider buys and sells must be available to the public once executed.
As an outsider to the organisation you should take note of what insiders are doing. They know the organisation better than anyone else.
In this article, we aim to cover some key points investors should keep in mind, whilst also highlighting some sites, (like finfiz) that one can follow to find out what insiders are getting up to.
Emotions
Inherently people tend to be horrible investors. Emotions make people erratic and irrational in their investment decisions. So much so, that we often forget to cross reflect and see what insiders are actually doing. Due to this biased human behavior and a lack of knowledge about the firm, potential buyers oftentimes don’t engage in strong buying opportunities whilst owners sell out of fear that they will lose even more money.
Here’s a valid case scenario for you, why? Cause we care about you, duh!
Amazon (AMZN)
Once upon a time, investors were deeply unhappy with the prolonged stagnant growth of Amazon with a 2/3 year flat period, underperforming other tech giants like Apple (AAPL) and Microsoft (MSFT).
However, despite this, all the long-term key performance indicators (KPIs) remained intact and were supported by one of the directors who acquired $400k worth of the stock. It was later declared a top pick by many financial journalists.
Take Note of Quantities of Buys
People tend to have a general assumption about insider trades, right?
- If insiders are buying stocks then it means they must know something juicy, we as mere mortals have no connection to.
Although this does carry some weight, the proof is not entirely in the pudding, but rather, the amount of slices taken at one given go, or within short intervals of time.
One of the most significant findings came from Alldredge et al. who found that clustered trades (multiple insiders buying close to each other) outperform solitary trades significantly.
Not So Much Insider Sales.
On the other hand, insider sales tend not to give any direction in the overall future performance and returns of a stock. In fact, there are multiple studies supporting this theory.
When CEOs in large companies tend to sell their stock it doesn’t mean that they have lost faith in their company, far from it. In fact, there are many reasons why a CEO would sell their stock, such as:
- wealth diversification;
- exercising granted stock options; and
- freeing money to buy other things.
However, keep your eye out for the clusters! If there is a significant outflow, and many people are exiting from their positions within a short interval of time, take note.
To Wrap it all up
Insider buys and sells can add a load of insightful value to investors, however, there are patterns. Single trades are meaningless, timing is important and quantities of sales must be considered. May be worth considering these tips next time you’re analysing a company.
If you’re interested in joining us on our journey, join our Facebook group: The Investment Hub — Malta or check out our website investmenthub.mt
Disclaimer:
Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.
