An insider buy or sell occurs when a director, officer or executive (such as a CEO, CFO or COO) has information about a company that is not public. That individual then buys and sells shares of the company stock based on that information. Regular investors (like you!) can take a look at insider buying and sellling in order to identify the direction that the company's executives believe that the company might go.
Insider buying is not the same as insider trading. Insider trading occurs when corporate insiders make illegal stock purchases based on information that is not public.
Let's take a look at insider buying, how to identify insider buying, whether or not insider stocks are a good investment, top insider buying stocks and how to invest in insider buying stocks. By the time you're done reading, you'll have a better understanding of how insider buying might work in your advantage.
What is Insider Buying?
The U.S. Securities and Exchange Commission (SEC) calls insiders those in management, officers or any beneficial owners with more than 10% class of a company’s security.
Insiders must file SEC forms every time they buy or sell shares in order to prevent insider trading or to show that they are in some way not illegally benefiting from the information that they have privy to based on their management position. In addition, they cannot dump their shares within six months of their purchase, which means they cannot benefit from swing trades. Most of the time, it pays to pay attention to insider buying because company leaders often have a very good idea of whether the company's stock will go up or down.
If company insiders invest in the company, it's a good sign that the company is headed into bullish territory — that the stock of the company will go up. On the other hand, if insiders sell, you can consider that to be a bearish sign — that prices will eventually fall.
High insider ownership can show confidence in a company's value and increase potential shareholder value. Insider selling might not be cause for alarm unless you see a tremendous amount of selling.
How to Identify Insider Buying
Since insider ownership and trading can impact share prices, the Securities and Exchange Commission (SEC) requires companies to file reports which can show regular investors clear evidence of insider activity.
You can take a look at the forms, Form DEF 14A, Schedules 13D and 13G and Forms 3, 4 and 5 on the SEC's EDGAR database or the SEC Info Insider Trading Reports. Let's take a look at each individual form:
- Form DEF 14A: Form DEF 14A, which is formally titled the Definitive Proxy Statement, lists directors and officers and the number of shares they each own of a particular company. Publicly traded companies are required to file Form DEF 14A prior to shareholder meetings. The form also shares information about people who own more than 5% of a company's stock.
- Schedule 13D and Schedule 13G: Schedules 13D and 13G also share beneficial ownership information. The law requires anyone who owns more than 5% of a company's stock to file Form 13D within 10 days of a stock acquisition. The form also asks for the reason for the stock acquisition. Schedule 13G also shows the public about anyone who owns more than 5% of company stock, though it requires less information. Owners who acquire more than 20% must file a Form 13D.
- Form 3: Form 3 showcases insider beneficial ownership when shareholders have more than 10% of voting power. Individuals file Form 3, also called the Initial Statement of Beneficial Ownership of Securities, when they initially purchase shares.
- Form 4: Form 4, also called the Statement of Changes in Beneficial Ownership, reports changes in ownership of those who own 10% of a company's stock.
- Form 5: Also known as the Annual Statement of Changes in Beneficial Ownership, Form 5 shows all holdings on an annual basis. Insider trading must be filed electronically through EDGAR within two days of the transaction.
Which insider should you watch? It's a good question. If several insiders act in similar ways, it's a good indication that there's a consensus among the company's top individuals. You may also want to pay attention to individuals who have a proven history of making positive moves. Ultimately, watching the CEO and CFO is an excellent indicator that can help you understand whether or not a particular company is a good investment.
You may find these forms difficult to understand. Luckily, you don't have to rely on these forms in their entirety. The MarketBeat Insider Transactions Screener offers a simple way to help you understand insider trading activity by a public traded company (based on any quarter over the past 20 years).
Are Insider Buying Stocks a Good Investment?
Is insider buying a good investment? It depends, of course, on a few factors. As an investor or trader, insider buying can offer opportunities as long as you're a shrewd analyst. However, it also comes with certain risks.
For example, investments in small and/or midsize companies may have higher price fluctuations and growth stocks may be more susceptible to earnings disappointments. Investment value may fall or fail to go up due to economic, investor sentiment and market perceptions and more. In other words, there are other factors that can change a company's performance. You can lose money despite a CFO's hefty investments in the company.
Top Insider Buying Stocks
Let's take a look at a few insider buying stocks you may want to consider investing and trading as of the date of this article's publication.
Occidental Petroleum Corporation
Occidental Petroleum Corporation (NYSE: OXY), headquartered in Houston, Texas, acquires, explores and develops oil and condensate, natural gas liquids (NGLs) and natural gas worldwide. Its sectors include the following:
- Chemical segment: Chlorine, caustic soda, chlorinated organics, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates and calcium chloride, vinyl chloride monomer, polyvinyl chloride and ethylene.
- Midstream and marketing segment: The midstream and marketing segment gathers, processes and markets oil, condensate, NGLs, natural gas, carbon dioxide and power, transportation and storage capacity.
Asana Inc., (NYSE: ASAN) incorporated in 2008 and headquartered in San Francisco, operates a work management platform worldwide which can help individuals arrange tasks, helps strategize product launches, marketing campaigns and more. A wide variety of industries can use Asana, including technology, retail, education, nonprofit companies, government, healthcare, media and financial services.
Summit Therapeutics Inc.
The biopharmaceutical company Summit Therapeutics Inc. (NASDAQ: SMMT), founded in 2003 and based in Cambridge, Massachusetts, discovers, develops and commercializes medicines to treat infectious diseases in the United States and Latin America.
The company initiates clinical programs focusing on Clostridioides difficile (C.diff) and has a main product candidate, ridinilazole, a small molecule antibiotic in Phase III clinical trials for the treatment of C.diff bacteria.
The company also offers a SMT-738, for combating multidrug resistant infections primarily carbapenem-resistant Enterobacteriaceae infections and the DDS-04 series for the potential treatment of infections caused by the Enterobacteriaceae.
How to Invest in Insider Buying Stocks
Next, we'll examine how to trade downtrending stocks, starting with identifying the method you want to use to trade.
Step 1: Do your research.
Take a look at the forms on the SEC's EDGAR database to determine the right investments for you. You can also skip the complicated step of looking at forms and stick to the MarketBeat Insider Transactions Screener.
Step 2: Identify the method you want to use to trade or invest.
There are several main methods to trade and invest. Let's take a look several methods of investing and trading that makes the most sense for your comfort level and goals:
- Buy-and-hold investing: Buy-and-hold investors make purchases based on the intention to hold onto the stocks for the long term. Buy-and-hold investors hold investor shares over a number of years, possibly even until retirement.
- Day trading: Day trading means that you close out of positions within the same trading day that you take them out. You can use a number of different strategies to target stocks (including insider buying) to determine the right types of stocks to target.
- Position trading: Compared to day trading, position trading uses longer-term charts, including monthly charts, to help you anticipate market direction. Your trade could last days or weeks.
- Trend trading: Trend traders look for successive higher highs or lower highs in order to identify the trend of a security. They benefit from the ups and downs of the market and can also take insider buying into account.
- Swing trading: What's the difference between trend trading and swing trading? Trend traders tend to focus on broader economic news, while swing traders trade based on short-term price changes. Swing traders trade more frequently and for a shorter time period and take larger positions. Traders usually see price volatility as a new trend tries to establish itself, and that's when swing traders get going.
No one method is better than another, but you must choose an option with which you feel comfortable. You can also choose a combination of these types of investing or trading options or look into a wide variety of other types of trading and investing options.
Step 2: Open a trading account.
Do you already have a trading account? If not, choose the correct trading account and fund it. Don't forget to consider the fees involved, the platform that you want to use and all the other factors that will help you become a successful trader or investor.
Step 3: Start trading.
Once you've set up your trading account, consider paper trading before you start using real money. Paper trading lets you practice using a completely fake account with fake money. If you've never traded before, you may want to spend a chunk of time learning how to trade on a paper trading account before you officially get started.
Once you're ready to invest or trade after paper trading, don't trade more money than you're willing to lose. You can incur serious losses. You can also incur losses simply by investing in stocks as well.
Modeling your investing and trading after a company's head honchos (who are typically savvy investors) can be a great opportunity. After all, company insiders likely know a lot more about the goings-on in a company before you do! Their propensity for dumping or favoring a stock can help you choose the right stock to invest in or trade. However, it's best to never base an investment decision solely on insider knowledge.
Consider using fundamental and technical analysis in addition to evaluating insider buying trends in various companies before you get started. Evaluating a wide variety of factors can ultimately help you determine the right investment direction to go and will help you formulate the best plan for your goals, risk tolerance and other factors.