How Insider Trading Can Hint Of A Big Move In Stocks

Insider trading is often given a bad name because people often think of illegal activities. However an insider buying a stock does not do wrong if he buys it for long term capital appreciation. A CEO or CFO or person in the management team can use their own money to buy shares of their own company without flouting any law or regulations that are laid down by the SEC. That is provided they do not act on inside information to buy today and sell in a short period of time.

A Big Upside Move Will Happen When Insiders Buy A Lot Of Their Company's Stock

Let me ask you a question:

  • Who would know more about a company, its competitors, its industry and its sector? You or an insider working in the company?

Unless you are some stock market genius who happens to know a lot of things, then you will be better off betting on a company insider. Company officials and management are humans too. When they see an opportunity to profit from their company they won't hesitate to do so within the boundaries of the law.

For example, if CEO of Company A who has a net worth of $50 Million sudden puts in $25 Million in cash to buy the stock in his company, something really huge is going on in the company. Perhaps the CEO knows that the company is growing from strength to strength and the company share price will quadruple in 2 years time.

They know all these in advance because of the inside information they have before they public gets it. Never underestimate the power and knowledge of a person who is in a position of authority.

So how do you know when a CEO has bought shares in his company?

Insider Selling Hints Of A Decline In Stocks

On the flip side, if an insider start to sell significant amount of shares they have in the company, it can be a red flag that the company may no be doing that well. Anytime you see an insider selling tons of shares for no reason, do a deeper research into the stock.

Insider Buying Reports

Thankfully the Securities and Exchange Commission has made it clear that anyone in the management position has to declare his or her transactions in their companies' stock. Anyone who buys a substantial amount of shares in the company will also have their name listed for the public to see.

There will be a delay of course but that's alright because insiders who really buy for investments will not sell their shares in the near future. So where can you get information on insider buying?

One of the best places is to go to Finviz.com and click on the insider trading link to look at the top insider buying or selling.

Finviz gives us very useful information regarding insider trading. They even give us the name of the insider, the position that he or she is in and the date as well as the amount of shares and value of the shares. Pretty significant information that will give you an idea of what the insider is doing.

For example, if you look at the first screenshot you might notice that Mark Zuckerberg sold off some shares. The two day activity netted him over $50 Million. More than what many of us would make in a lifetime. Is that selling important or significant? To most of us yes, but to Mark Zuckerberg who has a huge fortune, what is $50 Million? Perhaps he just needs some cash at hand to buy some things. It does not mean that Facebook is in trouble.

So, we ultimately have to judge for ourselves how significant the buy or sell transaction is to the future of the company.

Finviz provides a graphical way for you to see companies that have recent insider buying and insider selling activities. You can click on the signals tab and choose insider buying or selling and then a list of stocks with their daily stock charts will appear. A trader or investor can really get a feel of the stock that the insider recently traded.

If a stock is bottoming or just started a new uptrend and you see insider buying activity not too long ago, it may signal to us that the insider is acquiring shares. Something interesting might be happening to the stock in the future.

When Is Insider Buying Or Selling Important?

With all the insider trading activity going on in so many different stocks, which one is important and which are not important? In order to know which is which you need to learn about the 4 Stages That Every Stock Goes Through.

  • Significant amount of shares sold by insiders in Stage 3 and early part of Stage 4 is bad for the stock
  • Significant amount of shares bought by insiders in Stage 1 and early part of Stage 2 is good for the stock

A significant amount may mean different value for different insiders. If a CEO of a company has a net worth of $10 Billion and he is only buying $10 million worth of shares, it might not mean anything. You need to exercise common sense and judgment.

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