Insider purchases vs. sales: Insider purchases are a much more reliable indicator than sales, in particular, purchases on the open market. Insiders sell for many reasons – to purchase assets, to fund their children education, estate planning, etc. However, there is most often a single reason for buying a stock – to make money. At the same time, sales could also be very important – see below.

Transaction size: The dollar value of a transaction is important. A $200,000 insider purchase is more significant than a $2,000 purchase. Pay attention to a cluster of transactions by the same buyer over several days, a week or a month. If an insider wants to buy a large amount – several purchases over a period of time are often the best way to do it.

Transaction size vs. current holdings: An insider purchase of $200,000 worth of shares that increases his company stock ownership to $400,000 is more important than a buy of $1 million to add to a position of $100 million. Look for significant increases in the insider’s position.

The type of the purchase transaction: Open market buys are more important than option exercises. Insiders typically exercise their options at a significant discount to the market price of the company stock. They make money even if the stock price declines. Often they exercise the options, which may soon expire (not necessarily because this is a particular good time to buy their company stock). On the other hand, open market purchases represent a much higher risk to the insiders and are usually a bullish sign. Often, insiders buy on the open market because they do not have exercisable options available, and yet they still want to buy the stock at that particular time. This is why we only use open market transactions.

Insider Title: Insider transactions by those who are close to day-to-day operations of the company (CEO, CFO, or similar titles) tend to be more significant than outside directors or owners.

Transactions by multiple insiders: Watch for several insiders either buying or selling stock over the same period of time. When all of them are buying or all of them are selling, it is a more reliable indicator that the company stock will soon change in value. This indicator becomes even more important if all insiders in this group change their stock ownership in a significant way.

Current share price vs. insiders’ price: Do not chase the stock if the current price is much higher than what insiders paid. Chances are the current price already reflects the reason why insiders bought the stock. There is no rush! Most likely, you will find similar or better opportunities later.

Insider sales: While insider sales are not as reliable an indicator as buys, you still need to monitor the sales. For example, if you notice that several insiders are unloading significant amount of stock in their company over the same period of time – that may be a very significant bearish indicator. There is a high likelihood that the company may not be doing well.

The time horizon: Insiders tend to buy early. Statistically speaking, most of the extra return to investors monitoring the insider transactions materializes in about 30 days after insiders buy stock. The actual timing varies widely; in some cases the result shows up in a matter of days, in others – it may take several months or longer. The important point is that insider buys tend to be a better long-term predictor than a short-term one.

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