Does Insider Selling Mean It's Time to Sell?

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Actions speak louder than words. While business leaders are always happy to tell you all the reasons why their stock is a buy, the actions of company’s insiders can tell a different story about a company’s investment prospects. While individual buys and sells among insiders is not necessarily noteworthy, a major trend in buying or selling by corporate insiders could provide useful insights into the future of the markets.

And right now, corporate insiders are selling like crazy.

What Is “Insider” Selling?

While some trading by corporate insiders can be considered illegal insider trading, most buying and selling by insiders is completely legal. As long as the trades are not made based on material, non-public information, corporate executives and others 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 to ensure that everything is fair for regular investors who don’t have advance access to financial results. Because of this, board members and executives at public companies must publically report every time they buy or sell their own company stock.

There are many legitimate reasons for corporate officers to buy or sell. They could believe the company is headed in the right direction and want to put more of their own money into the company’s stock.

They could have received a large number of shares as part of their compensation package and want to sell a chunk of shares to buy a new home or diversify their investments.

But it’s also possible that they know something, and want to sell off their shares before the market drops or their company’s stock takes a nosedive.

Where Can You Find Insider Transactions?

Institutional investors and insiders are required to file SEC form 4. The Securities and Exchange Commission, or SEC, created Form 3, Form 4, and Form 5 specifically for insider and institutional stock trade reporting, as investors in those roles have a much greater opportunity to take advantage of inside information for illegal activity.

Informed investors take the time to review insider trades before pulling the trigger and entering their own buy and sell orders. The more information you have when making investment decisions, the better. The SEC created the EDGAR system to give the public access to a wide range of public reports, including Form 4. In addition, the NASDAQ website offers a search feature where you can find Form 4 filings by company.

For example, a wrestling enthusiast looking to invest in their favorite entertainment company, World Wrestling Entertainment (WWE), 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, so it is up to you to decide which you prefer when searching for insider transactions.

How Should You Use Insider Reports?

If your search for insider trades at a particular company yields 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 company leadership thinks the stock is going good places and they personally want in on the profits. A trend of selling activity may indicate that executives think the stock is going down over the upcoming time period, and are trying to sell before the price falls.

While you can infer intent based on stock purchasing and selling trends, you never know exactly why the transaction took place. Because you can’t call up the CEO and ask, your best option is to also look at the company’s financial statements, annual reports, and other public information and use that in conjunction with the insider transaction data when making your own investment decision.

Insiders Are Selling. What Does It Mean?

If one executive shows a lot of selling activity, but the others are holding their shares, it’s not necessarily a red flag that something is wrong.

If you see a pattern of executives getting stock option grants and then selling a portion, that’s likewise not a major concern. But if you see a pattern of selling across the board without a notable cause, it may be a good time to take note. Some investment researchers look for this type of pattern, particularly when it is not offset by a reasonably similar level of buying.

And such a pattern may be underway. A February 2017 insider trading report from Vickers Weekly Insider showed that corporate executives were selling at 11 times the rate they were buying, according to CNBC. The report found that the last two times the ratio jumped like this, the S&P 500 declined in the following period. In early 2014 the ratio broke 8 to 1 and the S&P fell nearly 6 percent. In 2007 the ratio was over 11 to 1, similar to the recent report’s findings, and the S&P later fell 68 points, or just under 5 percent. Predicting drops in the overall market from the insider selling-to-buying ratio looks to be a promising indicator.

For Long-Term Results, Focus on Fundamentals

There are many factors that go into the decision to buy or sell a stock. Looking at insider buying and selling activity is an important indicator that may help you predict future swings in stock prices, but you should never look at that alone. Instead, use insider activity as one of many signals in your own investment decision-making system. Also consider the company’s fundamentals, analyst estimates, the most recent news, and what you predict for the company’s future operations.

A company’s fundamentals are ultimately the best indicators of its long-term success. Short-term trading is very risky for investors. If you focus on buying shares with a long-term focus in sustainable, high-quality businesses, your portfolio will see great results. If you tie all of that together and include insider trading trends as an additional factor, you will be on track for great investment success.