The Truth About Insiders’ Buying and Selling

This is a guest post from Tusk Trader, an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

There are websites and newsletters dedicated to following what insiders at public companies are doing with their own shares of the firms they work for. Small changes in shares are dissected and analyzed with the same precision as Crosby at a Penguins practice. The problem is that most of it is a waste of time. Successful traders are very good at ignoring the news that is meaningless. News of an insider selling is completely useless most of the time. The reasons for the insider to buy or sell do not have to be disclosed and the reasons for an insider at a firm to be selling shares are limitless. It can, and often does, have nothing to do with the firm itself. The high level employee could be going through a divorce or have a child that just got into Harvard. This insider could have returned from a trip abroad to discover their indoor pool has flooded into their wine cellar and now cash is required for repairs. Some of the reasons this person needs to raise some cash could be interesting or even salacious, but they don’t always reflect what is going on at the firm.

So as an investor or a trader, it is best to ignore the information about who is selling how much. There simply is not enough helpful trading knowledge to be gained from it. You will turn yourself into Sherlock Holmes before you figure out exactly what is going on in the insider’s life and what the real reason is behind the selling. Focusing on who is selling generally leaves you with more questions than answers.

Insider buying is different. Insiders buy when they think the stock will be going up. There are not many other reasons an insider would buy more shares. That is information a trader or an investor wants to know. Someone who knows more than you about the firm thinks that the stock price will move higher. That is some information a trader can really sink their teeth into.

Thanks Tusk. Make sure to follow Tusk Trader on twitter: @tusktrader