Insider buying, what does it mean?
Have you heard about insider buying and thought it was illegal? We'll explain what it really means.
What is insider buying?
Typically insider buying is when a director, officer or executive buys shares within the company. Insider buying isn’t the same as insider trading.
Insider buying is not a crime when the purchases is based on public information, such as up coming events like mergers, spin offs, earnings etc. Executives and other insiders typically buy when they believe the company is undervalued, that’s why people pay attention to insider buying.
On the other hand when we see large insider selling this creates a red flag as it normally means there is dwindling confidence from within the company and is a bearish signal. But this doesn’t necessarily mean the company is in bad shape.
Difference between insider buying and insider trading.
Insider buying is based off of public information, something that the average investor also has access to. Insider trading on the other hand is illegal as the people who are buying and selling shares of a company knows information such as earnings or other corporate events before being released to the public.
Insider trading gives an unfair advantage with non-public information and could potentially allow them to make larger profits than a typical investor.
Insider buying = legal with public information.
Insider trading = illegal with non-public information.
Types of insider buying.
Executives have a direct play in implementing plans for the company. It is quite common for successful executives to be compensated with shares as a reward for exceptional work. These are typically offered as either a one-off awards for an exceptional year or on a more regular basis, normally subject to good company performance.
Share options is an agreement where a company grants a employees with the option to purchase a certain number of shares at a specified price in the future. Share options normally have a fixed price which is known as the exercise price. These agreements usually have conditions the company has to meet, for example achieving a certain level of profitability over a set time period.
Because the share price is usually fixed at a market price and this can act as an incentive for higher level of performance for the employees or whoever is granted share options.
Save As You Earn (SAYE):
SAYE is also known as ‘saving related share option scheme’ and is designed to help employees to save money tax free in order to purchase company shares. Under the SAYE scheme a employee can save £500 per month. These contracts can last 3-5 years. Once the fixed period of saving which is specified on the contract the employee can exercise their options to purchase shares at a fixed price.
Resources to research insider buying.
Using the the insider buying as information can be a great gauge of insider confidence of the business and can be used along side other due diligence and give you a complete view whether or not to invest into a business. There are multiple great resources to find out this information but we will look at two of the best.
Gurufocus is one of the best resources for insider trading research. Giving you the information such as the company ticker symbol, company’s name, insider position, buy/sell, cost & amount of shares.
They offer a feature where you can filter out to the company, market cap or even the region. For example, if you were solely looking for large insider buys within UK companies, this can be done as easy as a click of a button.
Finviz gives you a huge amount of information to break down recent sales, buys or options exercised.
You get information such as the stock, the name, relationship to the company, the type of transaction as well as the number of shares and the value of the transaction. You can filter out the list to just the insider buying.
A great feature Finviz offers is the ‘Top Insider Trading Recent Week’, This gives you all the most recent and largest transactions.
Insider trading is typically viewed as illegal but there is much more to insider buying and selling than many realise and there is a fair distinction between public and non-public information which is used.
Insider buying also have high amount of regulations and in the US if anyone wishes to do an insider buy, they have to contact the SEC and send a electronic form called Form 4. The form sends details of the company’s insider trades. A Form 14A is also filed and lists of all the directors and officers along with the shared interests they have.
Large insider buying can be used as a green flag of good business confidence of the future performance, the opposite can be said for insider selling of company shares.
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Examples of insider buying.
Ford Motor Co has recently had two insider purchases. A director purchased 38,789 shares worth almost $750,000, second purchase was from an executive chair who purchased 267,697 shares worth almost $4.5 million.
Another insider purchase was from the Co-CEO of Netflix. Purchasing 51,440 shares worth $20 million.
In 2018 Tesla made a deal with Elon Musk that if he built the business into a $650bn company within a decade they would reward him with $55.8bn bonus. In January 2020 Tesla had a market value of $1.1 trillion. It resulted in the three tranche reward being awarded to Elon Musk. Each of the tranches gave Musk the right to buy 8.4 million shares at $70 each.