Actions speak louder than words. Business leaders are often happy to tell you all the reasons why their stock is a buy. But the actions of company insiders can tell a different story.
Buys and sells among insiders are not always noteworthy. However, a major trend in buying or selling by corporate insiders could provide good insights into the future of the markets.
There are benefits to using insider selling activity to gauge where a stock's value might be headed, but it's not a perfect method. Be aware of the downsides, too.
- Insiders must publicly report their selling, so any investor can see when a given insider is selling.
- Insiders often have better insight into a company than the average person. Tracking insider selling could indicate when to buy or sell a stock.
- Tracking insider selling isn't a perfect method—insiders can be wrong, and going solely off of insider selling means you may miss the broader context.
What Is Insider Selling?
Some trading by corporate insiders is illegal insider trading. But most buying and selling by insiders is legal. As long as the trades are not made based on information that isn't public, those with insider access can legally buy and sell stock in their own investment accounts.
Though it is legal to buy and sell, insiders do have a special set of rules to follow. This is to ensure that everything is fair for people who don’t have early access to financial results. Because of this, board members and executives at public companies must publicly report every time they buy or sell their own company stock.
There are many legitimate reasons for corporate leaders to buy or sell. They could feel certain the company is headed in the right direction and want to put more of their own money into its stock. They could have received a large number of shares as part of their yearly raise. Maybe they simply want to sell a chunk of shares to buy a new home or diversify their investments.
But it could also mean that they know something. They may want to sell off their shares before the market drops or their stock takes a huge dip.
Where Can You Find Insider Transactions?
Institutional investors and insiders must file SEC Form 4. The Securities and Exchange Commission (SEC) created Forms 3, 4, and 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.
It's a good idea to take the time to review insider trades before making your own buy and sell orders. The more knowledge you have when it comes to investing, the better. The SEC created the EDGAR system to give the public access to a wide range of public reports, such as Form 4. Also, the NASDAQ website offers a search feature where you can find Form 4 filings by company.
For instance, let's say you're a wrestling fan looking to invest in World Wrestling Entertainment (WWE). You can quickly view stock trades by CEO (and occasional star) Vince McMahon and other insiders with a couple of clicks.
Both of these systems should provide the same information. It's up to you to decide which you prefer when searching for these types of transactions.
How Can You Use Insider Reports?
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.
If a company shows a lot of buying activity on the insider list, it is a good signal that leadership thinks the stock is going places. They personally want in on those profits. A trend of selling, on the other hand, may mean that executives think the stock is going down soon. They may be trying to sell before the price falls.
While you can infer intent based on stock buying and selling trends, you never know exactly why the transactions took place. Because you can’t call up the CEO and ask, what else can you do?
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.
What Does It Mean When You See Someone Selling?
What if one executive is doing a lot of selling, but the others are holding their shares? This is not necessarily a red flag. If you see a pattern of leaders getting stock option grants and then selling a portion, that’s also not a major concern.
But if you see a pattern of selling across the board without a cause, it may be a good time to take note. Some investment researchers look for this type of pattern. It's more notable when it is not offset by a similar level of buying.
The Bottom Line
There are many factors to think about before buying or selling stocks. Looking at insider buying and selling can be a helpful sign that may help you predict future swings in stock prices. But it shouldn't be your only source of information.
Instead, use this as one of many signals that helps you make decisions. You should also be thinking about the company’s fundamentals, analyst estimates, recent news, and what you predict for the company’s future.
Fundamentals are the best indicators of a company's long-term success. Short-term trading is very risky. Focus on buying shares with a long-term focus on sustainable, high-quality businesses. Your portfolio will be more likely to see better results.
Tie all of that together, and be sure to include insider trading trends as an additional factor. Then, you are even more likely to be on track with making good investments.