DEFINITION of Insider Buying
Insider buying is the purchase of shares of stock in a corporation by someone who is a director, officer, or employee of a company. Insider buying should not be confused with insider trading. The act of insider trading refers to corporate insiders making trades based on private information, a deed that is illegal. Insider buying is based on public information and often occurs when insiders believe that their stock is undervalued.
BREAKING DOWN Insider Buying
The availability of the information used to make investment decisions can be the crucial legal difference between insider trading and insider buying. Insider trading is often a temptation faced by corporate officers and board members who know of new products or circumstances that could cause the stock price to fluctuate. Those in this position must be careful to adhere to special regulations when purchasing stock in their companies to avoid penalties or legal action.
On the other hand, insider buying often occurs when employees believe that the public is not valuing their stocks properly. Knowing that insiders are purchasing stock can signal future stock appreciation.
How Insider Buying Can Influence Investment Activity
If an insider increases their stake in a company, the act may be taken as a sign of confidence in anticipated growth. The insider may believe that the strategies put into action by the executive leadership will result in greater market presence, increased profit or other opportunities for the business. For example, if a company wins a new contract with a client, it may be a stepping stone for more contracts to follow. This could prompt insiders to buy up shares in the company based on a belief that the executive leadership has put the business on an advanced growth trajectory.
The type of insider who buys shares can motivate other parties to invest or expand their own stake in the company. If a member of the board of directors purchases more shares, it could attract the attention of the public. If senior executives acquire more shares, other investors might use the activity to assess the company’s potential progress.
Executives naturally have a direct hand in implementing the plans set forth for the company. The individual success of an executive is can affect the company’s development. It is common practice for companies to reward executives and employees with shares as part of their compensation. Companies can also offer employees options to acquire additional shares at discount prices.
When senior executives buy shares in great quantities without being prompted by discount programs, it may be taken as a strong vote on the prospects for the company.