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.
I'm an investment enthusiast with a deep understanding of financial markets and insider trading. My experience spans years of actively following investment strategies, particularly those related to tracking insider activities in the stock market. Let me share my expertise on the concepts discussed in the article:
1. Peter Lynch and Fundamental Analysis:
- Peter Lynch, the legendary Fidelity Investments manager, emphasized the importance of fundamental analysis. He led the Fidelity Magellan Fund to extraordinary growth, attributing his success to a thorough understanding of a company's product and practices before investing.
2. Insider Definition and SEC Regulations:
- The U.S. Securities and Exchange Commission (SEC) defines insiders as management, officers, or beneficial owners with more than 10% ownership of a company's security.
- Insiders must comply with SEC rules, filing forms for every transaction to ensure transparency. They are restricted from selling shares within six months of purchase to prevent illegal insider trading.
3. Insider Buying and Selling Signals:
- Insider buying is generally considered a bullish sign, indicating management's confidence in the company and an expectation of a rising stock price.
- Insider selling is considered bearish, suggesting insiders may anticipate a future decline in stock prices.
4. Harvard Study on Insider Transactions:
- A 2003 study by Harvard University and Yale University found that insider purchases outperformed the market by 11.2% annually, while insider sales did not yield comparable profits. This reinforces the significance of tracking insider activities.
5. Reporting Requirements and SEC Forms:
- Public companies, excluding the smallest microcaps, must report insider transactions promptly. Forms such as SEC Form-3, Form-4, and Form-5 are filed to disclose ownership changes.
- The SEC's EDGAR database provides public access to these filings, making it a crucial resource for investors.
6. Tools for Tracking Insider Transactions:
- Various financial information websites offer databases and reports on insider transactions, making it easier for investors to stay informed.
- Forbes, Finviz, GuruFocus, and J3SG are among the platforms that provide real-time updates and searchable databases on insider dealings.
7. Insider Buying in Canada:
- In Canada, insider transactions are regulated by provincial authorities, and reports are filed on the System for Electronic Disclosure by Insiders (SEDI) within five calendar days.
- Websites like Canadianinsider.com list SEDI data for companies traded on the TSX and the TSX Venture.
8. The Bottom Line:
- U.S. and Canadian laws mandate quick disclosure of insider transactions on public databases.
- Investors are advised to monitor insider buying as it can serve as an indicator of potential stock price increases.
In summary, the article emphasizes the importance of tracking insider activities through accessible databases and understanding the signals they provide for informed investment decisions.
