When the CEO buys his or her own company’s stock, is that a good enough sign to also invest? This is an investment strategy that has been followed by some investors for years. It is an iteration of “buy what you know”, after all the CEO must know quite a bit about their company, so why not you or me?
To be clear, insider buying is when an executive or board member or other employee buys their stock. This is not inside information which is illegal, the use of material non-public information to make money at the expense of the public. Insider buying (or selling) simply means when an employee buys or sells the stock of the company they work for. This practice is legal and quite common.
In short, the consensus is that when an insider, especially a very senior executive, buys their stock, that is generally a good indicator the stock will go up over time. However, there are nuances to this and this is where a financial advisor will help refine your thinking in how to apply this strategy.
For example, not all buying is the same. Sometimes an executive is buying the stock simply because she thinks it’s a great long-term investment, which is the very best reason. Other times it’s a board member buying the stock because it is expected of them.
The rule of thumb for buying does not usually apply when an executive sells some of their stock. There could be any number of reasons why someone is selling their stock from buying a second home, to paying for college, or notably in high profile divorce cases. Famed investor Peter Lynch opined that selling is hard to extrapolate as to why, but buying is almost always for positive reasons.
According to this report by Kiplingers, using the data and analytics platform Refinitive Stock Reports Plus it is possible to predict stocks that increase in value based on insider buying. In their report they illustrate a number of stocks that ranked high in the Refinitive report meaning the stocks increased in price after insider buying.
One of the surprising findings of this research is that the insider need not buy very large amounts of the stock to garner a high ranking by the service. For example, First Merchants, ticker symbol FRME is interesting. Within six months of board member Patrick Sherman buying shares, the stock price appreciates by 12.5%, and the history is quite statistically significant given they use 115 prior purchases to base his “Buy Score” at 99 out of 100 possible score.
Like any investment strategy and tool, it is ideal to confer with a financial advisor that can help ensure using such methods optimally.
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