Insider Ownership Analysis – Are the Interests of Management and the Common Shareholders Aligned

In this article about the insider ownership analysis, I reveal what I believe is the minimum and maximum share ownership percentage, owned by corporate insiders. Although I have to admit, that determining an appropriate percentage of stock ownership is not an exact science, I do believe a thorough evaluation of a company’s stock ownership is an important step in my stock investment analysis.

In the article: Insider Stock Ownership – Which Exclusive Type of Stock Owners Are Your Fellow Shareholders, I distinguish three types of stock owners: off-the-radar investors, on-the-radar investors and corporate insiders. As I already explained in this article, I do not consider the holdings of the off-the-radar investors (i.e. the private investors) to be relevant, as their individual holdings in a specific stock are normally relatively small. Therefore I only evaluate the company ownership of the other two stock owner groups: the corporate insiders and the on-the-radar investors.

Company Ownership Evaluation of Corporate Insiders

The main reason why I believe it’s important that corporate insiders have a certain minimum percentage of share ownership is logically: only then their interests are aligned with the off-the-radar investors (i.e. the private investors): we all benefit from a rising share price and we all feel the pain when the share price is declining. With their own money on the line, I believe that the corporate insiders are more devoted to accomplish success.

However, I do not want the influence of the corporate insiders to be too big, as then they can do almost everything they please. For instance, acting as the company’s management they could ask their shareholders to vote in favour of certain proposals, which vote they can influence as they control a very large part of the shares outstanding. Therefore I have determined the maximum share ownership percentage of the corporate insiders at 35%.

As I believe it’s acceptable that the percentage of stock ownership in companies with a big market cap is smaller than in those with a smaller market cap, I have set the minimum share ownership by corporate insiders as shown in the table below:

Market cap  Minimum Share Ownership Percentage  Maximum Share Ownership Percentage 
< 100 Million  5.0%  35% 
100 -1,000 Million  2.5%  35% 
> 1 Billion  1.0%  35% 

To find out how I evaluate the ownership of the on-the-radar investors, I refer you to this article: Institutional Ownership Assessment – How I Assess the Shares Owned by Institutions.

You may also want to read...

  1. Mining Companies Analysis - Learn How to Invest in Mining Stocks. To execute your own mining companies analysis, I have created a lot of (sub)pages about the relevant terminology and working methods from the mining sector.
  2. Oil and Gas Companies Analysis - How to Invest in Energy Stocks. I created different pages about the relevant terminology and working methods from the energy sector to conduct your own analysis for oil and gas companies.
  3. Understanding the Stock Market - How Do Stocks Work. To help you with understanding the stock market, I have created some articles to explain how stocks work and I also reveal my own stock market analysis in this chapter.
  4. How to Invest in Shares - Learn How to Start Investing in Stocks. In this chapter I inform you how to invest in shares - the way. I also reveal which (free) resources I use to execute my due diligence.
  5. How I Invest in Stocks - My Preconditions for Selecting Undervalued Stocks. In this chapter I answer the question: how do I invest in stocks? Thus, I explain which investment rules I follow whilst selecting companies for my stock portfolio.
  6. Stock Investment Analysis - A More Detailed Elaboration on How to Buy Stocks. When a company complies with my preconditions for selecting undervalued stocks, I will elaborate my stock investment analysis to assess the quality of it's assets, management, etc.

If my articles are helpful to you, please consider supporting my work by making a small donation...

Leave a Comment