Insider Buying

What Is Insider Buying?

Insider buying is the purchase of shares in a corporation by a director, officer, or executive within the company. Insider buying is not the same as insider trading, which refers to corporate insiders making illegal stock purchases based on non-public information.

Understanding Insider Buying

Insider buying is not a crime when the buying is based on public information. Additionally, since insiders have unique insights into their own companies, they often gobble up often shares when they believe the stock is undervalued. That's why people pay attention to insider buying.

The availability or accessibility of information is the crucial legal difference between insider trading and insider buying. Insider trading can happen when corporate officers, executives, or board members know of new products, merger negotiations, or other circumstances that could cause the stock price to move higher.

Those in this position must adhere to regulations regarding public and private information to avoid penalties or legal action. Generally, insiders are not allowed to trade on any information that is not available to the public.

Insider buying, on the other hand, can occur when an executive of a company believes that the public is not valuing shares properly. That is, the insider feels that the stock is at attractive levels and represents a worthwhile investment. Knowing that insiders are purchasing shares of their own company can signal an opportunity to buy the stock as well, if those insiders are correct in viewing the stock as a bargain.

If an insider increases stake in a company, the act may be taken as a sign of confidence in the company's growth and earnings. The insider may believe that the strategies put into action by the executive leadership will result in greater market presence, increased profit, and other opportunities for the business. The size of the buying is also significant because large purchases signal greater confidence compared with small insider buys. For instance, it is more significant if an insider buys one million shares than if the insider purchases 100,000 shares.

Types of Insider Buying

If a company wins a new contract with a client, it may be a stepping stone for more contracts to follow. Therefore, reports that the company is adding new contracts, which are also available to the general public, 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. Changes in regulations, new product launches, and reports of new partnerships might also serve as catalysts for insider buys.

The type of insider 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, analysts and 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 plays a key role in the company’s development. It is common practice for companies to reward executives and some key employees with shares as part of their compensation.

Companies can also offer employees options to acquire additional shares at discount prices. On the other hand, when senior executives buy shares in great quantities without being prompted by discount programs, it might signal a vote of confidence on the future prospects for the company.