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SHOULD YOU BE CONCERNED WHEN INSIDERS SELL THEIR SHARES?

June 19, 2024
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Insiders buying or selling shares can often lead to investors making uninformed decisions

 

Nobody knows a business better than the people running the business, so when investors see them buying or selling a certain stock, it causes some type of emotional reaction. The key is to determine the reason behind the buying or selling first,  before you make a move.

 

Buys and sells among insiders are not always important. If you however notice serious trends or patterns, it can provide you with valuable insights into the future of the share price or business itself.

 

Be very careful of using only this information for a buy or sell decision. It is simply one of the indicators in a research process.

 

INSIDER TRADING VS INSIDER SELLING

Insider Trading is illegal. It is the act of buying or selling stocks based on information that's not known to the public. It involves a direct violation of trust. The market is designed to be fair. The public must all receive information at the same time, thus the SENS and SEC Filing Processes exist.

 

Insider selling is 100% legal, as long as it is not based on information not known by the public.

 

INSIDER SELLING PROCESSES

Though it is legal to buy and sell, insiders have a special set of rules to follow, which ensure that everything is fair for people who don't have early access to financial results. Accordingly, board members and executives at public companies must publicly report every time they buy or sell their own company stock.

 

Where do you find these public reports?

  1. JSE: SENS Announcements
  2. USD: SEC Form 4 Filing
  3. Websites like https://www.insidertracking.com/

 

Specific things to take note of when insiders are buying or selling:

 

The timing

The JSE has a term called Closed Period. The time period between when a listed company's financial results are completed and when these are announced to the public. This closed period is meant to prevent any insider trading ahead of the release of the results. No directors or insiders familiar with the numbers are allowed to trade during this period. It is illegal to do so.

 

Take note when insiders buy or sell around financial reporting periods. The closed period rule is not perfect, and I can get poetic about how poorly enforced it is.

 

Insiders might also sell because their shares are part of their remuneration structure. A CEO can get paid in cash and partially in shares. Those shares have vesting periods. So, if she received shares in 2019 and they have a 3-year vesting period, she can only sell them in 2022. These sales should come as no surprise to any investor, as they are fully disclosed in the companys financial statements. You  can often pre-empt them months ahead of time.

 

The frequency

This is far more critical than the timing.

 

If a company shows a lot of buying activity on the insider list, it is a good signal that leadership thinks the stock is going places. They personally want in on those profits. A trend of selling, on the other hand, may mean that executives think the stock is going down soon. They may be trying to sell before the price falls.

 

While you can look at stock buying and selling trends, you NEVER REALLY KNOW EXACTLY WHY the transactions took place. Because you can't call up the CEO and ask?

 

What if only one executive is doing a lot of selling, but the others are holding their shares? That is not necessarily a red flag. That executive might have a valid reason. So, look at patterns.

 

But if you see a pattern of selling across the board without a valid reason (like listed above under a share scheme), it may be a good time to take note. It is even more critical when it is not offset by a similar level of buying. This means trouble could be brewing.

 

CONCLUSION

There are many factors to think about before buying or selling stocks. Looking at insider buying and selling can be helpful,  but do not make decisions based on this alone.

 

Study the business, financials, valuation, etc. Combine what you know about the business with the insider buying and selling patterns.


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