RE:RE:RE:RE:RE:RE:Support from Within It pays to know what a company's owners are up to. By watching the trading activity of corporate insiders and large institutional investors, it is easier to get a sense of a stock's prospects. While insider or institutional ownership on its own is not necessarily a buy or sell signal, it certainly offers a handy first screen in the search for a good investment.
Insider Ownership
Insiders are a company's officers, directors, relatives or anyone else with access to key company information before it's made available to the public. Savvy investors, making the reasonable assumption that insiders know a lot more about their company's prospects than the rest of us, pay close attention to what insiders do with company shares. Since insider ownership and trading can impact share prices, the
Securities and Exchange Commission (SEC) requires companies to file reports on these matters, giving investors the opportunity to have some insight into insider activity.
High insider ownership typically signals confidence in a company's prospects, and ownership in its shares, in turn, gives the management an incentive to make the company profitable and maximize
shareholder value. Indeed, academic research has shown that firms with significant insider purchasing tend to
outperform the market indexes.
On the other hand, you can have too much insider ownership. When insiders gain corporate control, the management may not feel responsible to shareholders. This occurs frequently at companies with multiple classes of stock, which means one class carries more voting power than another.
While
insider buying is usually a good sign, don't be alarmed by insider selling, unless there is a lot of it. Insiders tend to buy because they have positive expectations, but they may sell for reasons independent of their expectations for the company.
Look for clusters of activity by several insiders. If a company has more than one insider trading similarly over a short period, there's a sign of a consensus of insider opinion. Also, large transactions mean more than small trades.
It's important to know which insiders to watch. Insiders with proven track records with their Form 4 activity should be watched more closely than those with little or poor past records. The most telling trading activity comes from top executives with the best insights into the company, so look for transactions by CEOs and CFOs.
Sure, insiders and institutions tend to be smart, diligent and
sophisticated investors, so their ownership is a good criterion for a first screen in your research or a reliable confirmation of your analysis of a stock. But never base an investment decision solely on insider or institutional ownership information.
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