Insider activity is generally a mundane part of the market; insiders buy and sell shares of their own companies all the time.
Insiders selling isn’t something you should pay that much attention to out of context. Insiders might sell stock for any number of reasons, but they buy shares of their own companies for one reason and one reason only – they expect the share price will go up.
Regardless of whether they buy or sell, though, insiders must report any trades they make in their own companies’ shares to theSecurities and Exchange Commission (SEC)within 48 hours. The details of those trades are publicly available on the SEC’s website.
The insiders purchasing in a cluster should be high-ranking and paid for their role at the company. We’re looking for the CEO or the COO, not the chairman of the board.
I do like to see at least one director buying shares, though. This can be one of the things that tips us off to an opportunity.
Insider purchases should be made at market open and at market prices.
The insiders must be buying in size – that means several hundred or several thousand shares per purchase.
The purchases must be made in rapid succession over the span of a few days or weeks.
I want to see at least fiveinsiders buy shares in size in rapid succession. If only three or four insiders are buying, I want to see even larger purchases and executive participation.
Sometimes the company experiencinga cluster of insider buying isn’t doing well. A cluster of insider buys could mark it as a potential turnaround candidate. That’s the most dangerous kind of insider buy, and trading on it is very speculative. The risk is great, but the returns can also be phenomenal.
Another special case when it comes to insider buyingiswhen biotechorpharmaceutical companies are involved. When insiders buy here, it’s usually because they have good information from clinical trials long before theFood and Drug Administrationor the public knows about the trial data.
