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 $20 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. This article will examine who these insiders are, why investors should take pay special attention to their transactions, and how investors can capitalize on insider knowledge legally through public databases that track insider buying. (Read more When Insiders Buy Should Investors Join Them?)
Who Are Insiders?
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.” Insiders must abide by certain rules and fill out SEC forms every time they buy or sell company shares. Furthermore, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick swing trades based on their knowledge (Section 16(b) or the Securities Exchange Act).
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 a sign that stock prices are likely to go up. Conversely, insider selling is considered bearish—those in the know may be off loading their stocks in an expectation that prices will soon fall. So it pays to keep an eye on the activities of insiders.
Studies have shown that prompt and timely dissemination of insider transactions are profitable for investors, as insiders tend to beat the market. The odds in favor of an insider purchase being followed by further purchases are three times greater than the odds of a purchase followed by a sale.
Insider Buying in the United States
For companies listed on U.S. stock exchanges, the SEC requires that all but the smallest of microcaps that trade on the over-the-counter boards have to report insider transactions within two business days. First, they must file the SEC’s Form-3 at initial ownership, SEC Form-4 whenever any changes take place, and the 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 of the U.S stock exchanges. If combing through the EDGAR database is too time consuming, then you’re in luck, because there are many websites that track and publish insider transactions. Below are some 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 also features a free and searchable database of insider filings in the United States and an optional fee-based subscription for insider dealings in the Dutch and Canadian markets.
- InsiderTrading.org is another free and searchable service.
- 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 insiders as well as institutional ownership.
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 navigation, there are sites such as Canadianinsider.com that lists 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.