Paul Price: Trade Like an Insider

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Paul Price: Trade Like an Insider

Dr. Paul Price

|

Paul Price Headshot
Nobody knows what a company is truly worth better than the people running the show. Insiders, defined as company officers and directors plus unrelated 5% or greater holders of a company’s stock, are legally allowed to buy and sell shares. The main restriction they face is holding these share for more than six months if they wish to keep any gains. Sales within shorter periods would require disgorgement of gains.
High ranking officials typically receive incentive stock options or unvested shares as part of their compensation packages. That is why insiders, as a group, always sell more company stock than they buy.

Looking at Insider Transactions

The Thomson-Reuters Insider Transactions ratio measures the current relative Sell/Buy proportion. The number is updated weekly and noted as bullish, neutral or bearish. Heavier than normal buying, defined as less than 12 shares sold for every open-market share purchased, is a good sign. Sales volume 20 times greater than buying volume indicates caution may be advisable.

Signals typically are short-term in nature. Bullish readings generally lead to higher indices weeks to months, rather than years, later. Insider Trading signals generate more false negatives than erroneous positives. The chart below confirms just how accurate and valuable this indicator was during the year ended December 5, 2014.

Thomson Reuters Insider Trading with SPY correlation

The Difference Between Insiders and Individual Investors

Insider actions contrast starkly with those of individual investors. Lipper’s equity fund flow data shows that Mom & Pop tend to be net redeemers of stock mutual funds near low points. More often than not, they then re-enter the market only after prices have rebounded.

If you hope to get things right you will need to learn to fight your emotions. For improved results consider increasing mutual fund purchases when shares are cheap. Train yourself to sell only into strength.

The Bottom Line

It makes sense to mimic the people at the top of the investment food chain. Trade like the insiders do and you’re more likely to get gratifying results. Act smarter and watch your net worth grow.

Your psyche and your accountants will both thank you.

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Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

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Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

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Find out why $30 trillon is invested in mutual funds.

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Paul Price Headshot

Paul Price: Trade Like an Insider

Dr. Paul Price

|

Nobody knows what a company is truly worth better than the people running the show. Insiders, defined as company officers and directors plus unrelated 5% or greater holders of a company’s stock, are legally allowed to buy and sell shares. The main restriction they face is holding these share for more than six months if they wish to keep any gains. Sales within shorter periods would require disgorgement of gains.
High ranking officials typically receive incentive stock options or unvested shares as part of their compensation packages. That is why insiders, as a group, always sell more company stock than they buy.

Looking at Insider Transactions

The Thomson-Reuters Insider Transactions ratio measures the current relative Sell/Buy proportion. The number is updated weekly and noted as bullish, neutral or bearish. Heavier than normal buying, defined as less than 12 shares sold for every open-market share purchased, is a good sign. Sales volume 20 times greater than buying volume indicates caution may be advisable.

Signals typically are short-term in nature. Bullish readings generally lead to higher indices weeks to months, rather than years, later. Insider Trading signals generate more false negatives than erroneous positives. The chart below confirms just how accurate and valuable this indicator was during the year ended December 5, 2014.

Thomson Reuters Insider Trading with SPY correlation

The Difference Between Insiders and Individual Investors

Insider actions contrast starkly with those of individual investors. Lipper’s equity fund flow data shows that Mom & Pop tend to be net redeemers of stock mutual funds near low points. More often than not, they then re-enter the market only after prices have rebounded.

If you hope to get things right you will need to learn to fight your emotions. For improved results consider increasing mutual fund purchases when shares are cheap. Train yourself to sell only into strength.

The Bottom Line

It makes sense to mimic the people at the top of the investment food chain. Trade like the insiders do and you’re more likely to get gratifying results. Act smarter and watch your net worth grow.

Your psyche and your accountants will both thank you.

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Read Next

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