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.”
Insiders must abide by certain rules, including filing SEC forms every time they buy or sell 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.
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 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. They must 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.