The legendary Fidelity Investments manager Peter Lynch once said, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
Lynch, who grew the Fidelity Magellan Fund from $18 million to $14 billion in 13 years, was a believer in fundamental analysis and understanding a company’s product and practices well before investing in it. And as a group, who understands a company’s product, management, and future prospects better than its own leaders? Investors can capitalize on insider knowledge legally by following public databases that track insider buying.
Indeed, some may say that tracking the buying and selling activities of a company's insiders is an integral part of due diligence when investing in a company. Here's how to do it.
- The SEC's Edgar database allows free public access to all filings related to insider buying and selling of stock shares.
- A number of financial information websites offer easier-to-use databases of insider buying.
- Canadian transactions are available on a government website and on financial websites.
Who Are Insiders and Why Do They Buy or Sell?
The U.S. Securities and Exchange Commission (SEC) defines insiders as the "management, officers or any beneficial owners with more than 10% class of a company’s security.”
Insidersmust abide by certain rules, including filing SEC forms every time they buy or sell shares. Furthermore, to prevent insider trading, orbenefiting illegally from material non-public informationthat their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase.
This effectively barsinsiders from profiting from quick swing trades based on their knowledge.
Keeping an eye on insider activity pays off. If they think their stock is about to rise (or fall), they're probably right.
What Does It Mean When Insiders Buy or Sell?
As a general rule, insider buying shows management’s confidence in the company and is considered a bullish sign. In other words, the insiders think their stock price is likely to go up. Insider selling is considered bearish; those in the know may be offloading their stock in an expectation that prices will soon fall.
A 2003 study by Harvard University's Leslie A. Jeng and Richard Zeckhauser and Yale University's Andrew Metrick found that insider purchases beat the market by 11.2% per year. Notably, insider sales were not comparably profitable.
That's why many investors keep an eye on the activities of insiders.
Insider Buying in the U.S.
For public companies, the SECrequires that all but the smallest of microcaps that trade on the over-the-counter boards have to report insider transactions within two business days. Theymust file the SEC’s Form-3 at initial ownership, SEC Form-4 whenever any changes take place, and SEC Form-5 for any changes that were not reported earlier or were eligible for deferment.
A list of Form-4 filings can be found on the SEC’s EDGAR database, a collection of legal filings specific to every company currently publicly listed on any U.S stock exchange. If combing through the EDGAR database is too time-consuming, you’re in luck. Many financial news websites track and publish insider transactions. Below are some of the sites that contain databases as well as reports on insider transactions.
- Forbes has a semi-daily report highlighting some important insider transactions.
- Finviz features a free and searchable database of insider dealings.
- GuruFocus has a free searchable database of insider filings in the U.S. and an optional fee-based subscription for insider dealings in the Dutch and Canadian markets.
- J3SG is a free website (although sign-up is required to access all the features) with real-time updates on insider transactions and a vast and searchable database of insider and institutional ownership.
Insider Buying in Canada
In Canada, insider transactions are regulated by provincial regulators and insider reports have to be filed on the System for Electronic Disclosure by Insiders (SEDI) within five calendar days.
For ease of access to that information, there are sites such as Canadianinsider.com that list SEDI data for companies traded on the TSX and the TSX Venture.
The Bottom Line
In the United States and Canada, the law requires insiders to quickly disclose purchases and sales of company stock and file them on a public database. As insiders tend to beat the market, investors would do well to track insider buying. Insider buying can be a sign that the stock price will soon rise.
FAQs
The SEC's Edgar database allows free public access to all filings related to insider buying and selling of stock shares. A number of financial information websites offer easier-to-use databases of insider buying. Canadian transactions are available on a government website and on financial websites.
How do companies track insider trading? ›
An insider trading investigation may include wiretaps, interviewing witnesses, examining trading records, and reviewing phone records, among other things.
How do you test for insider trading? ›
How Advisory Firms are Detecting Insider Trading Violations
- A review of firm's investments in light of employees' personal conflicts.
- Testing for trading patterns in client or personal accounts around new stories.
- A review of circ*mstances surrounding unusually profitable trades in client or personal accounts.
You can retrieve reporting forms from the SEC's EDGAR database or the SEC Info Insider Trading Reports. The most relevant forms that help investors review insiders include Form DEF 14A, Form 13D and 13G, as well as Forms 3, 4, and 5.
What website tracks insider trades? ›
InsiderTracking is the only free source for insider trading alerts and reports across both the US and Canadian stock markets.
What report shows insider trading? ›
In most cases, when an insider executes a transaction, he or she must file a Form 4. With this form filing, the public is made aware of the insider's various transactions in company securities, including the amount purchased or sold and the price per share.
Who monitors insider trading? ›
While proof of insider trading can be difficult, the SEC actively monitors trading, looking for suspicious activity. Under Rule 10b5-1, however, a defendant can assert an affirmative preplanned trade defense.
How often is insider trading caught? ›
For example, the US Securities and Exchange Commission (SEC) prosecutes approximately 50 insider trading cases per year (SEC, 2015).
What are the red flags of insider trading? ›
2. Recognize red flags of insider trading: There are several red flags that can indicate potential insider trading activity. These include unusual trading activity, sudden changes in a company's financial performance, and unusual behavior by company insiders such as selling a large amount of stock.
Is insider buying a good indicator? ›
Insider buying can signal that a company expects its stock's value to increase. “For me, buying after a big rally can certainly feel reckless, and even lazy. Most investors are smart enough to wait for a pullback before they pull the trigger,” he said.
Insider trading is an extraordinarily difficult crime to prove. The underlying act of buying or selling securities is, of course, perfectly legal activity. It is only what is in the mind of the trader that can make this legal activity a prohibited act of insider trading. Direct evidence of insider trading is rare.
What is the Dirks rule? ›
The Dirks test stems from the 1983 Supreme Court case, Dirks v. SEC, which established a blueprint for evaluating insider trading. The Supreme Court ruled that a tipee assumes an insider's fiduciary duty to not trade on material nonpublic information if they knew or should have known of the insider's breach.
What percentage of stock makes you an insider? ›
An insider is a director, senior officer, entity, or individual that owns more than 10% of a publicly-traded company's voting shares.
Is it illegal to buy stocks with insider information? ›
Insider trading is when non-published information from a company is used to make a trading decision by someone with an invested interest in that company. It is illegal to engage in insider trading, but it is legal to trade your company shares as long as you follow the guidelines set by the SEC.
How long do insiders have to report their trades? ›
Generally, any change in an insider's beneficial ownership of the company's securities is reported on a Form 4. Insiders usually must file a Form 4 within two business days after a change in beneficial ownership. This two-day reporting period begins when a transaction is executed, not when it settles.
Are insider trades public? ›
Legal trades by insiders are common, as employees of publicly traded corporations often have stock or stock options. These trades are made public in the United States through Securities and Exchange Commission filings, mainly Form 4.
Is stock ownership public record? ›
Generally, no although you are required to report if you own more than 5% of a publicly traded company. Also, public companies are required to report all shareholders owning more than 5% plus the ownership of their directors and executives.
Are insider transactions legal? ›
Insider transactions are legal if the insider makes a trade and reports it to the Securities and Exchange Commission, but insider trading is illegal when the material information is still non-public.
How do I know if I am an insider? ›
You are considered to be an insider six months before the date when your company goes public. If you become a director or senior officer less than six months before the initial public offering (IPO), then your insider status would begin on the date when you assumed the title of director or senior officer.
