What Insider Buying and Selling Can Tell Investors
Insider buying or selling refers to the purchase or sale of company stock by a corporate insider. Numerous studies have shown that when insiders buy and sell shares of their own companies, they typically fare better than most stock market investors. SEC rule dictates the parameters in which insiders may engage in company stock transactions. Insider transaction information is recorded for public record and is available for review in the company’s annual report.
Definition of an Insider
An “insider” is someone with access to corporate information that has not been made public. This material information, not yet disclosed to the public, is considered “insider information”. The SEC defines insiders as the company directors, officials, or any individual with an interest of 10% or greater in the company.
Insider Buying
Insider buying of stocks is considered by many to be a strong buy signal for potential investors, providing of course that the company is fundamentally sound and well-managed. In fact, a recent study by UCLA and New York University demonstrated that a group of inside buyers they observed saw returns that beat market averages by almost 10%.
It is generally believed that insider buying is a more useful signal that selling. The theory is that if these insiders are willing to risk their own money on the stock, they must have good reasons. Buying is seen as especially strong when several insiders purchase at the same time.
According to Peter Lynch, the great investment manager, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
Insider Selling
The selling of small amounts of stock by company executives is common and typically not cause for panic. The selling of larger amounts can be seen as negative by investors who might perceive that these insiders know something about the company’s future that is not favorable.
To see insider transaction information, go to Yahoo! Finance, and enter the stock symbol in the Get Quotes window. on the lower left-hand side, click on Insider Transactions under Ownership.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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