Why Investors Pay Attention to What Insiders are Up To

The business pages are rarely lacking in news of high-profile C-suite types buying and selling shares in the companies they work for, and recent times are no exception. Billionaires creating leverage for massive acquisitions, meme-stock leaders swinging stock prices, CEOs making moves in a down market — insider activity can be a source of significant interest (and speculation) among investors.

While insiders' motivations are anyone's guess, following the activity of a company's biggest shareholders is one way to corroborate ideas for your own investments, and can be much easier than it sounds. (No fancy connections needed!) Here, we discuss how investors can use insider buying and selling as a jump-off point for their more detailed research.

What makes someone an insider?

An insider is someone with controlling interest in a company, or a person who has regular access to confidential information concerning a company and/or significant influence over it, such as directors, officers and executives of the organization. We're talking about anything from a company's top executives (CEO, CFO, COO, etc.), to an outside member of its board, to a lawyer hired to help the organization navigate a confidential merger or acquisition.

What are the rules for insider buying and selling?

While the term "insider trading" often has negative connotations, insiders can buy and sell legally. In fact, legal insider trading happens every day, when corporate insiders buy or sell stock in their own companies. They simply need to do so within the confines of company policy and government regulations. Most importantly, at the time of the trade, insiders must not be in possession of relevant, non-public information, which would give them an unfair advantage. And within five days of the trade, they must report it to SEDI, Canada's electronic system for filing and publicly disseminating insider trading reports.

What happens when insiders trade?

Depending on the size of the transaction, insiders can move the price of the stock when they buy or sell. When managers and directors make substantial trades, people notice. In some cases, their trades make the news.

Where can investors discover what insiders are trading?

Beyond the big headlines, how would an everyday investor know what insiders are buying and selling? You'll have to be a bit of a detective, but the information is out there. On SEDI, the Canadian government website where insiders must report their trades, click English or French, then “Access public findings." There are various websites that specifically track insider trades, such as Marketbeat. You can also sign up for media insider reports, monitor a stock's news feed in the trading dashboard and visit regulators' websites.

What can insider reports tell investors?

Insider filings don't provide investors with a crystal ball. But they can provide interesting clues that could potentially factor into your investment decisions.

Insiders can't use information that's material and non-public to buy or sell shares. But many people believe that if a high-ranking executive buys shares in their own company, they probably know something other people don't — perhaps, say, an insight into the company's potential for future success.

Yet, investors must be discerning, because the motivation for an insider buy could be less straightforward. It's not unheard of for an insider to make a big purchase in an attempt to foster belief in a stock through news headlines, similar to how companies might use share buybacks to signal confidence. On the flip side, a transaction could just as easily reflect an insider's personal or financial circumstances and have nothing to do with the company to begin with.

Decoding insider trades is far from an exact science, so you'll have to commit to doing your research. If you've found what looks like a useful insider lead, make sure to look at the bigger picture. Be skeptical about what's behind media headlines, analyze companies and industries from all angles, and avoid making important investment decisions relying on a single report.