Insider purchases

Insider purchases and sales are noteworthy milestones but no road map to investing success.

You're building a mosaic to decide whether you want to be invested in a company, this is just one piece of the puzzle.

But be careful before you follow in a CEO's footsteps. Knowing how much stock to put into an insider's actions, literally and figuratively, is a tricky business.

The most important aspect that the lay investor should keep in mind is that it is a first screen. Despite that caveat, though, "it's the best one that I know of".

When you see an executive put large sums of money on the line, clearly that's a signal that he feels very confident, but that doesn't necessarily mean that the stock's going to go up.

Some insider buying maybe just simply window dressing or a statement to investors.

It's possible that smaller purchases could be aimed largely at drumming up more buying.

They may hope that the publicity of their having bought will have a positive effect on the direction of the market price.

Insider Buying and Management Stock Options Can Signal Opportunity

Only one reason for insider buying

In their search for complete information on businesses, investors often overlook one very important clue. In most instances no one understands a business and its prospects better than the management. 

Therefore investors should be encouraged when corporate insiders invest their own money alongside that of shareholders by purchasing stock in the open market. 

It is often said on Wall Street that there are many reasons why an insider might sell a stock (need for cash to pay taxes, expenses, etc.), but there is only one reason for buying. 

Investors can track insider buying and selling in any of several specialized publications, such as Vickers Stock Research. 

Management stock-options provide the specific incentive to boost the company's share price

The motivation of corporate management can be a very important force in determining the outcome of an investment. 

Some companies provide incentives for their managements with stock-option plans and related vehicles. 

Usually these plans give management the specific incentive to do what they can to boost the company’s share price. 

Be alert to the motivations of managements at the companies

While management does not control a company’s stock price, it can greatly influence the gap between share price and underlying value and over time can have a significant influence on value itself. 

If the management of a company were compensated based on revenues, total assets, or even net income, it might ignore share price while focusing on those indicators of corporate performance. 

If, however, management were provided incentives to maximize share price, it would focus its attention differently. 

• For example, the management of a company whose stock sold at $25 with an underlying value of $50 could almost certainly boost the market price by announcing a spinoff, recapitalization, or asset sale, with the result of narrowing the gap between share price and underlying value. 
• The repurchase of shares on the open market at $25 would likely give a boost to the share price as well as causing the underlying value of remaining shares to increase above $50. 

Obviously investors need to be alert to the motivations of managements at the companies in which they invest.

Insider Buying and Management Stock Options Can Signal Opportunity

In their search for complete information on businesses, investors often overlook one very important clue. In most instances no one understands a business and its prospects better than the management. Therefore investors should be encouraged when corporate insiders invest their own money alongside that of shareholders by purchasing stock in the open market.

It is often said on Wall Street that there are many reasons why an insider might sell a stock (need for cash to pay taxes, expenses, etc.), but there is only one reason for buying. 

Investors can track insider buying and selling in any of several specialized publications, such as Vickers Stock Research.

The motivation of corporate management can be a very important force in determining the outcome of an investment. 

• Some companies provide incentives for their managements with stock-option plans and related vehicles.  Usually these plans give management the specific incentive to do what they can to boost the company's share price. 
• While management does not control a company's stock price, it can greatly influence the gap between share price and underlying value and over time can have a significant influence on value itself. 
• If the management of a company were compensated based on revenues, total assets, or even net income, it might ignore share price while focusing on those indicators of corporate performance.
• If, however, management were provided incentives to maximize share price, it would focus its attention differently. 

For example, the management of a company whose stock sold at $25 with an underlying value of $50 could almost certainly boost the market price by announcing a spinoff, recapitalization, or asset sale, with the result of narrowing the gap between share price and underlying value. The repurchase of shares on the open market at $25 would likely give a boost to the share price as well as causing the underlying value of remaining shares to increase above $50.

Obviously investors need to be alert to the motivations of managements at the companies in which they invest.

Insiders buying more of their own stock is a bullish signal

There are thousands of reasons for insiders to sell stock, but there's only one reason they'll buy:  They think the stock is going to go up.

After all, insiders know more about their company than outside investors ever could.  If they're buying, there's probably a pretty good reason for it.

Past studies bear this reasoning out.  They show that insider-buying is a bullish signal at both the company-specific and macro-market levels.