Credit: Shutterstock photoWhat 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.
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?
As the editor of the Insider Trader portfolio, I've looked at hundreds of insider buys. Patterns emerge. Insiders often give out secret signals, but you have to know what to look for.
Here are 3 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.
Continued . . .
------------------------------------------------------------------------------------------------------
These Insiders Know Something You Don't
The Vice Chairman and two Directors have suddenly poured over $387,000 of their own money into their financial midcap company. The Directors had already been awarded shares as part of their compensation but they wanted MORE.
Clearly they expect a major price jump. Could it have something to do with the company receiving regulatory approvals to close on two major acquisitions?
This stock was just added to Zacks' insider stock portfolio which is only open to public entry until this weekend.
Look inside the portfolio now >>
------------------------------------------------------------------------------------------------------
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 3 Directors, the General Counsel and the Vice President of Marketing 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, deciding to buy some shares.
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 jump in.
What does that insider know that is different from the prior years? Why are they buying now? And how can you take full advantage of this buying activity?
Where to Find the Best Insider Buys
Anyone can go on the SEC website and get the insider trading information for a company, but it's time consuming to literally search through hundreds of individual companies.
Some investment firms collect the insider buying data and can provide it to you in a 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 excellent valuations. We do the work of sifting through all the insider buys.
Just a handful of stocks meet the demanding criteria of our Insider Trader.
Right now, we've narrowed it down to 10 insider buys that make the grade. In fact, we just added a cluster buy in which two Directors dipped deeply into their own pockets to buy shares - even though they had already been awarded shares for free. This is another invaluable "secret signal."
You are welcome to share our current insider trades with explosive gain potential, but access must be limited. Entry closes to new investors Sunday, June 5th.
Look inside the Insider Trader right now >>
Best,
Tracey
Tracey Ryniec is Zacks' value strategist and is the Editor in Charge of our Insider Trader.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
