Secrets to Successful Insider Trading by Zacks Investment Research
What REALLY happens when an insider buys stock?
I'm talking about insider "trading". This is the legal kind, when insiders buy and sell company shares.
There are a lot of different reasons that may influence why an insider is buying and if you should be following their lead.
But how do you figure out what is a good insider "buy" and if you should be jumping in?
The key is in the secret signals.
The Insiders Will Send Signals
Investors who want to get in on insider trading can simply buy what the insiders are buying.
There are plenty of lists for "insider buys" put out every week. But those lists don't really tell you the full story. It's simply a bunch of names and numbers of shares.
What's the REAL story behind the buy?
I've managed the Insider Trader service at Zacks for four months and have reviewed dozens of insider buys in that period. The insiders often give out secret signals, but you have to know what to look for.
Here are three of the secret signals that I use to find the diamonds in the rough of the insider trades. Find these secret signals and insider buying will no longer seem like a mystery.
3 Secret Signals to Successful Insider Trading
1) "The Lawyer Indicator"
The General Counsel (or "Senior Counsel" at some companies) is the company's top lawyer and is considered part of management. Being a lawyer myself, I can tell you that lawyers are, in general, risk averse. (Sorry lawyers!)
Therefore, when it comes to buying company stock, they usually err on the side of caution. They rarely buy shares on the open market unless they're seeing something that is really great at their company.
If you see the General Counsel buying, that is a strong secret signal. I call it "the lawyer indicator." Buy when the lawyers are buying.
2) Buy When There Are Cluster Trades
The insider buys that get the most publicity are the famous CEOs who buy, for example, $1 million worth of shares (or more) in one massive buy.
While these big buys are great, and can mean something exciting is going on at the company, I look for the complete opposite. I look for the "cluster" trades, where a group of insiders are all buying at the same time.
That means, for example, there may be three Directors, the General Counsel and the President of China Operations all buying smaller amounts of shares, but all deciding to do so around the same time. This type of cluster buying is rarer than the one big buy by the CEO and sends a powerful signal.
What do they ALL know?
3) Buy If Insiders Are Jumping in For the First Time
There are some insiders who buy company shares on the open market several times a year. Some of the senior insiders, like the CEO and CFO, are usually paid at a higher level than the other senior management and buying company shares isn't much of a hardship.
But for other senior management lower down the chain, like the General Counsel or the head of Human Resources, among others, there may be a different calculation when deciding to buy that $10,000 worth of stock.
It's not unusual to see insiders who have NOT bought shares in many years, if ever.
The insider who has NEVER bought shares before, but is now, sends a strong signal.
I'm not talking about someone who is new at the company. This would be an insider who has worked at the company for several years and only now has decided to buy shares.
What does that insider know that is different from the prior years? Why is he buying right now? And how can you take full advantage of this buying activity?
Where to Find the Strongest Insider Buys
Anyone can go on the SEC website and get the insider trading information, but it's too time consuming to search by individual companies.
Some investment firms collect the insider buying data and can provide it to you as a big weekly list. Have you ever seen one of those lists? The sheer number of companies can be overwhelming.
To solve this problem, our Zacks research team developed a strategy that monitors selected insider buying activity at companies that already show strong earnings and exciting valuations. Only a handful of stocks meet the demanding criteria of our Zacks' Insider Trader. And right now, we have narrowed it down to 7 insider picks that make the grade.
Profit From Insider Trading
Insider behavior matters because research based on real-time signals has shown that a properly modeled picture of insider actions can provide the most accurate reflection of the prospects for the company, industry, economic sector, or even the stock market in general, going forward. This makes perfect sense from an intuitive perspective. Corporate insiders possess all the necessary skills and characteristics that one could use to describe the "successful" investor.