Trading Rules Based On Insider Stock Trading
In this page we discuss the rules that we use to identify investment and trading opportunities. We welcome comments and advice from our readers.
- Stock purchases by company officers are more important than those of other
insiders (directors and beneficial owners). Corporate officers, after all,
are the people who manage the company and know the day-in and day-out operations of
the company. This is why we publish
Insider Stock Purchases By Officers Weekly Report and
Insider Stock Purchases By Officers Monthly Report
- Look for clusters of insider buyers.
It is more intriguing to see more than one insider buying their own company's
stocks within a relatively short time. We have two reports dedicated to clusters trading.
One is Clusters Of Insider
Buyers Weekly Report, the other
Clusters Of Insider Buyers Biweekly Report.
Note that one should watch out for funny clusters as explained in rule 7.
- Relative size of purchase amount.
When someone added $100,000 worth of stock to his $10 million position,
he boosted his holding by merely 1%. We cannot say this was an impressive trade.
On the other hand, if someone made a $100,000 trade and thereby doubled his position,
we would take notice.
- Background checking.
One can usually find information about corporate officers from the company's annual report. What we want to know is the executive's compensation level, so that we can gauge the relative importance of his trade. For example, a trade of $100,000 by an officer with annual compensation of $200,000 is more impressive than a trade by an officer with annual compensation of $1 million.
- Trading history and pattern.
This rule is probably the most important one and requires the most work to keep. There are a number of things that we want to discover. Did the insider have a successful trading history? Are insiders enthusiastic about their own company's stocks? For example, several insiders at Gateway Financial Holdings (GBTS) have been purchasing their company's shares over the last two years, even though the stock price has doubled in that period. Did the insider buy at a higher price but not continue to buy at much lower prices? Is the insider selling shares that he bought at higher prices? For example, an insider at SeaChange International Inc. (SEAC) bought a huge amount of shares before April 2005 and then sold a big chunk of his position later - at lower prices! The stock has declined another 40% since he sold.
- Fundamental analysis.
Since we are not schooled in finance and economics,
we have to keep this work at a minimum.
- Watch out for bad data.
We define any suspicious trading activity data or the data that we
cannot explain as bad data. Bad data can arise when
(1) the transaction price is outside the price range
reported by the stock exchange on that trading day;
(2) the shares traded by the insider are more than the number of shares traded that day,
as reported by the stock exchange; (3) a number of officers bought their
company's stock at exactly the same day and at the same price (funny cluster buys).
There are ample data to analyze every day,
so we simply ignore bad data when we come across them.
We hope our readers know more about these activities and can advise us.