We pay attention to purchases under $400,000 if we believe the buyer is smart but perhaps not as wealthy. In these cases, they may be middle-management insiders who have demonstrated a real feel for the stock with timely small purchases in the past. We research this timeliness by following SEC Form-4 filings, which must be completed by directors and officers of a company and by any shareholders who own 10% or more of the company’s outstanding stock. Studying the actions of smart insiders has always been a valuable investment tool for us.

What does insider selling tell you?

Investors monitor insider buying and selling since buying activity is often seen as a positive sign that executives believe the stock will rise in the future. Conversely, insider selling can be seen that executives believe the company and its stock price may underperform in the future.

Proving that someone has been responsible for a trade can be difficult because traders may try to hide behind nominees, offshore companies, and other proxies. The Securities and Exchange Commission (SEC) prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious What Investors Can Learn From Insider Trading activity.[12][13][14] The SEC does not have criminal enforcement authority but can refer serious matters to the U.S. Every CEO will have their own reason each time they sell stock. There are plenty of reasons to sell that have nothing to do with the underlying business. Maybe a CEO simply wants to sell a chunk of shares to buy a new home or diversify their investments.

Measuring long-horizon security price performance

They might be essentially cutting themself a paycheck by selling shares and pocketing the cash. The Securities and Exchange Commission (SEC) created Forms 3, 4, and https://accounting-services.net/bookkeeping-glendale/ 5 for insider and institutional stock trade reporting. That’s because people in those roles have a much greater opportunity to take advantage of inside information.

  • The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.
  • Disgorgement represents ill-gotten gains (or losses avoided) resulting from individuals violating the securities laws.
  • However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split.
  • When insiders do correctly assess their companies’ shares, it can be a matter of luck as much as anything else.

Back in January 2016, the CEO Jamie Dimon bought a massive 500,000 shares, worth $26M. The stock chart below shows that JPM shares did not really move much from 2014 to 2016. However, since Dimon bought his shares, the stock price started climbing. He bought the shares at an average price of $53, 60% below the current market price of $84, not a bad return (plus 3.6% of dividends).

Journal of Financial Economics

Looking back at market performance, we can see that in October 2008 the S&P 500 stood at approximately 800, 15% from the absolute bottom of the crisis, and almost 50% from the top achieved a year earlier (S&P at 1560). But it became even more accurate with the second wave of purchases in March 2009. If someone was to buy shares at this level, results would be handsome (S&P tripled in the following eight years). At small and mid-sized companies, virtually all insiders are privy to company financials. At big corporations, information is more dispersed and typically only the core management team has the big picture.

What Investors Can Learn From Insider Trading

What if one executive is doing a lot of selling, but the others are holding their shares? If you see a pattern of leaders getting stock option grants and then selling a portion, that’s also not a major concern. Business leaders are often happy to tell you all the reasons why their stock is a buy.

The timing and source of long–run returns following repurchases

Material information refers to any and all information that may result in a substantial impact on the decision of an investor regarding whether to buy or sell the security. Also on our radar for smart insider purchases are chief compliance officers. They tend to be knowledgeable about legal rules surrounding insider buying and are very careful in their purchasing actions. CFOs are very conscious of their company’s stock price and tend to be strategic about entry points. This article will summarize our current understanding of trading strategies and signals based on insider transactions.

  • Under this theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information.
  • Focus on buying shares with a long-term focus on sustainable, high-quality businesses.
  • This theory constitutes the background for the securities regulation that enforces the insider trading[10].
  • Alpha takes the volatility of a mutual fund and compares its risk-adjusted performance to a benchmark index.
  • Business insiders—including officers, directors, and those who own at least 10% of the company—must report changes in their holdings by the second business day after the transaction.

Accordingly, board members and executives at public companies must publicly report every time they buy or sell their own company stock. Over the last few months, numerous executives have bought company shares. In 2017 alone, two directors, the CIO and the CEO bought shares worth more than $6M (the CEO bought $5M worth of shares). Unsurprisingly, when the CEO disclosed his position, on the 21st of February, GNC stock climbed more than 10% on the news, from about $7.6 to $8.6 per share. At Integer Investments, we started a position on the news as well (as disclosed we exited our position at $9.7 after the earnings, now the stock is back to $8.12).

They might want to diversify their holdings, distribute stock to investors, pay for a divorce or take a well-earned trip. However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split. Your best option is to also look at the company’s financial statements, annual reports, and other public information. Use this along with the insider transaction data when making your own decisions. If you search for insider trades at a certain company and come up with several reports, you have the option to sift through the data and look for a trend.