I monitor insider stock trading not only to stay informed about the latest transactions in my portfolio but also to find potential companies to add to my portfolio. It’s important to exercise caution before adding a company to your portfolio if insiders are selling the company’s stock. Conversely, if insiders are buying more stock for their personal holdings and the company is undervalued according to my standards, I take that as a positive sign.
Insiders have access to sensitive information about their company that is not available to the public. Therefore, I follow their actions, not just their words. As Peter Lynch, one of the most successful traders of all time, once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
To interpret insider transactions accurately, it’s important to consider the insider’s total holdings in a specific stock, including the percentage of insider holdings that they bought or sold. I find it useful to determine the number of shares that an insider has acquired or disposed of in a certain period and at what price these transactions were settled. When two or more members of the management team are buying or selling a stock in significant numbers simultaneously, it’s a bullish or bearish signal, respectively.
Note: It is important to remember that insider stock trading should be considered as part of a company’s due diligence process as a whole. Do not solely rely on insider transactions when making investment decisions, and make sure to evaluate other factors such as the company’s financials, industry trends, and management team. Additionally, when insiders sell shares they’ve just acquired through stock options, it may not necessarily be a bearish signal as they may be doing so to cover income taxes payable on the share exercise. Therefore, it is important to carefully analyze the context surrounding insider transactions before drawing conclusions.