Insider Buying & Selling

You can read all the financial reports and prospectuses you can get your hands on, but there will always be people who know more than you ever will about whether or not a company is a good investment: the insiders.

And, thankfully, insiders are also investors in their companies just like we are. This is a good thing for two reasons:

1. When insiders own stock, their interests are the same as ours, so we can logically assume that their actions are geared towards increasing shareholder value.
2. We can monitor their buying and selling patterns to try and get a read on the direction the company is heading.

Insiders, by definition, are officers and directors with a stake in the company. They are the folks at the top making the big, corporate-wide decisions.

Here at MyWallSt, we like to see insiders with a greater than 5% ownership in the business they're paid to run.

You'll usually find that the older a company is, the lower the insider ownership.

You can find this information in the "Key Statistics" section on financial websites like Yahoo Finance.

When to Take Notice

From H. Nejat Seyhun's book Investment Intelligence from Insider Trading we learn when to sit up and take notice of insider buying and selling:

1. The higher up on the corporate food chain the trades are happening, the more you should care. In order of most noteworthy to least, it goes CEO > officer > board member.
2. Insider buying is a better signifier of things to come than insider selling. Selling can happen for any number of reasons, and often it's because the top brass are exercising their options, which is a very common form of executive compensation. Some people may want to make a big deal out of insider sells, but often it's just "noise."
3. When insiders are buying and selling, make note of recent share price movement. If they are buying shares while the price is rising, this is usually a sign that they expect it to keep rising. Conversely, if they're selling while prices are in decline, they may be trying to protect themselves from further losses.
4. The number of shares an insider is selling matters. Pay attention if they're buying or selling somewhere between 10,000 and 100,000 shares. Anything above or below that number isn't usually cause for concern.

There you have it... now, when the financial talking heads start squawking about insider buying and selling, you can take a few steps back and see if it's really anything that concerns you as a shareholder.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.