You can learn a lot by watching the people running the company. Insider purchases can be a sign that executives are buying their stocks because they believe it is too cheap.

Insiders often buy stocks because they have information, experience or convictions that average investors don’t.

For example, in early 2023, several insiders of Meta Platforms (META) bought shares following a steep selloff. The stock almost doubled in the following year.

This article will explain everything you need about insider trades so that you know how to use them to identify stocks with the potential to outperform.

Table Of Contents:

1. Insider buying is a powerful signal
2. What is insider trading in the stock market?
3. What makes someone an insider?
4. SEC filings: How insider trades are disclosed
5. How to track insider trading using TIKR
6. What to look for in insider trading activity
7. Red Flags & Limitations in Insider Tracking

Let’s get started!

Insider buying is a powerful signal.

When a CEO or CFO buys shares with their own money, they receive more information about the company than anyone else.

Insider buying and especially clustering, when several insiders purchase at the same time, tends to perform better than the average market.

These moves are often made after a poor performance of the stock, right before a turnaround.

The insiders’ buying of shares during a market crash is particularly telling. Insiders who buy shares during a market selloff are more confident than others.

Insider buying does not always lead to immediate gains. However, it can be a good way to identify companies in which the management believes.

What is insider trading in the stock market?

Many people have a negative view of insider trading because they associate it with illegal activities. However, most insider trading is legal and can be an important signal for investors who know how to interpret it.

Insiders are required to file a Form 4 with the Securities and Exchange Commission when they buy or sell their company’s shares.

These filings are made public, so individual investors can see what the people closest to the business do with their money.

What makes someone an insider?

Insiders are:

• Executives: The CEO or CFO of a company, as well as the COO and other “C-Suite leaders”.
• Members of the Board of Directors: Any director who is a member of a company’s board. They are usually experienced business leaders who provide strategic advice to companies.
• Big Shareholders: Anyone owning more than 10% of a company’s shares.
• Employees who have inside information: People with access to non-public key details. It is not easy to track and will not appear in most Insider Trading trackers.

Investors track these insiders’ moves because they are required to disclose when they purchase or sell stock.

SEC filings: How insider trades are disclosed

Insiders of corporations are required to submit a Form 4 within two days after the transaction.

The filing contains detailed information on who traded, what kind of transaction was involved, how many shares and at what price.

The SEC’s EDGAR database includes Form 4 filings, which are accessible to the public. Using TIKR to review the EDGAR system is a great alternative for investors who don’t want to spend hours on it.

TIKR gathers all recent insider trades of a company in one place and pulls results quickly from Form 4 filings. It saves time for investors and makes it easier to identify stocks that insiders buy.

How to track insider trading using TIKR

TIKR allows you to easily monitor insider activities without having to dig through SEC filings.

The platform will pull Form 4 data and other types into a dashboard that allows you to analyze insider trades easily.

Search for a company that interests you and click on the Insider Transactions tab.

For example, Dustin Moskovitz, who co-founded Facebook and is now co-founder and CEO of Asana, has been purchasing more shares in the business.

These are large transactions. Over the last month, he has bought 750,000 Asana shares worth over $10 million.

Marc Boroditsky, who joined Asana’s Board of Directors in April, recently bought more than $345,000 of stock.

Insider transactions on TIKR help you to answer important questions such as:

• Who is trading, and for how much?
• Multiple insiders purchasing at the same time is known as cluster buying.
• Has the insider made this trade consistently, or is it a one-time deal?

It is easy to track the people closest to the business who have the most knowledge.

Insider Trading: What to look for

The context and possible reasoning behind an insider’s trade should be evaluated.

What experienced investors look for

• Insider buying > Insider selling: While there are many reasons for insiders to sell, the majority of them buy because they believe in the future of their company. Senior executives’ open-market purchases can be a sign of confidence. Even more convincing is a consistent buying pattern across different quarters.
• Insider role: Was the trade done by the CEO, the CFO, the director or even a 10% shareholder? Senior management’s trades are often more important than those of directors or large shareholders.
• Cluster buying: When multiple insiders purchase stock at the same time, it indicates shared conviction. This pattern is more significant than an individual executive acting alone.
• Date Transaction Time-sensitive insights are important. Buying at a time of dips or before a catalyst is known can be a good sign.
• The number of shares and the price paid: Compare the size of the buy relative to the insiders’ historical activities and salary. Small purchases can be symbolic. Large purchases, particularly those that are a large portion of an insider’s salary or net worth, show a stronger level of conviction.
• Track record: Some people have a long history of making well-timed investments. Reviewing past transactions can tell whether an executive is prone to buying opportunistically or just out of habit.
• No Equity Raising or Dilution: Insider purchases that occur alongside frequent equity raisings or dilutions may not have the same impact. Search for trades which align with shareholder-friendly behaviour.

Insiders who buy in large numbers after bad news or over some time all indicate that something positive is brewing.

Red Flags & Limitations in Insider Tracking

Insider trading data is useful, but it doesn’t guarantee that you will find stocks which outperform.

Before using insider trading for buying or selling decisions, investors should be aware of certain limitations.

• Insider buying does not always lead to gains. Some insiders have a bad track record. Just because the CEO buys, the stock doesn’t necessarily rise.
• Insider selling isn’t always negative: Executives sometimes sell shares for personal purposes like tax, diversification or estate planning. It’s not always a sign of losing confidence in a business when an executive sells shares.
• 10b5-1 Plan Can Create Noise: Many executives sell stock according to a predetermined schedule using SEC Rule 10b5-1. These automated sales were prearranged and do not necessarily reflect any change in sentiment. Check Form 4 notes for a sale made under these plans.
• Options and Equity Grants: Not all insider trading involves actual capital at risk. Options exercises and restricted stock grants may inflate the number of insider trades, but they are less significant than open market purchases.
• Absence of context without fundamentals: Insider information should be considered alongside financial performance and valuation, as well as competitive positioning. Even aggressive insider purchases may not be enough to save a business in decline.

Understanding these red flags allows you to use insider information as part of an overall investment thesis.

Insider trading data can be paired with tools such as TIKR. This tool allows you to check the company’s financial health, valuation multiples and fundamentals.

FAQ Section

What exactly is insider trading?

Insider trading is the purchase or sale of stock by officers, directors, or significant shareholders. These trades can be tracked by Form 4 filings made to the SEC and are accessible publicly through tools such as TIKR and the SEC EDGAR Database.

How can I track the insider purchasing activity?

Platforms like TIKR aggregate insider filings in real-time. TIKR allows you to filter by role and transaction type and shows buying trends.

Insider buying means a stock is likely to go up.

Insider purchases do not always indicate that a company’s stock will rise, but they often signal confidence in its future. When paired with low valuations and strong fundamentals, they can be a sign of a possible opportunity.

Where can I find the Form 4 filings for insider trading?

EDGAR, the SEC system, contains Form 4 filings. However, platforms such as TIKR provide the data in a user-friendly format, with filters, alerts and historical context.

What are the most important things to look out for when analyzing insider trading information?

Insider trading information does not necessarily indicate that an insider has a more bullish or bearish view of a company. Insider trading can include automated selling plans, equity dilution, and small symbolic purchases. However, it does not necessarily indicate that an insider is more bullish or bearish about the company’s future. Insider trading must be considered in the context of valuation, financial health, and company trajectory.

TIKR Takeaway

You can get a glimpse of what insiders are doing with the money they have.

It can be used to identify undervalued shares, confirm a turnaround thesis, or detect early signs of internal confidence.

The TIKR terminal offers the most comprehensive financial data available on more than 100,000 stocks. It is a great tool for determining which stocks to purchase to build your portfolio.

TIKR offers institutional-quality research for investors who think of buying stocks as buying a piece of a business.

Disclaimer:

Please be aware that articles on TIKR do not constitute investment or financial advice, nor are they recommendations for buying or selling stocks. Our content is based on TIKR’s investment data and the estimates of analysts. It is possible that our analysis does not include the latest company news and important updates. TIKR does not hold any of the stocks mentioned. Thanks for reading, and happy investing.