Should you follow to buy the shares of a particular company if the CEO or Director of the company is buying the company's shares? The idea that insider trading activity may signal some sort of bullishness may be true. After all, they know well enough about the profits and loss and the direction of the company better than normal retailers like us. They have the most up to date information and companies' prospect much earlier before the flow of information goes to the public.
But before you follow blindly, here are some things to look out for in such situation:
- Employee stock options or awards- You need to examine carefully whether these insiders are buying the shares in an open market transaction or via employee stock awards. Most Directors level and above are granted stock options as part of their compensation package when they joined the company. These stock awards can only be vested upon exercising a certain number of years within the company. The former option (i.e purchase via open market transaction) is a better assessment of the bullishness relating to the prospect of the company.
For instance, CEO of First Reit, Dr. Ronnie Tan, has been purchasing its shares via open market transaction consistently in the recent months.
Director of Elec & Eltek, Mr. Chan, is another who has consistently been buying its own shares via open market transactions in recent months.
- Vote of Confidende - In times of bearishness, we may see CEO buying their own company's shares in order to give the investors a vote of confidence as well as providing support to its falling price. This is almost the same indication as a company's share buyback purchase which aims to provide support and reduce outstanding shares in the market whenever good opportunity arises.
Noble Group Chairman, Mr. Richard Elman, bought its own company's share price at a dollar during the recent down market in order to provide support to its price. Unfortunately though, it did not succeed and the shares continued to drop amidst the purchase from the CEO.
- Long term committment - CEO/Directors buy shares of their own company because of a long term committment. They usually have a longer time horizon than most retail investors and so are better at achieving equilibrium throughout the bull and bear market cycles.
To conclude, insider activities are easy to track due to the mandatory disclosures but hard to crack. As with all things in life, no one can guarantee that you will make profits by following these transactions solely. However, combining these factors with some diligent research, it will bring you a better decision on whether you should invest.
