What REALLY happens when an insider buys stock?
I'm talking about insider "trading". This is the legal kind, when insiders buy and sell company shares.
There are a lot of different reasons that may influence why an insider is buying and if you should be following their lead.
But how do you figure out what is a good insider "buy" and if you should be jumping in?
The key is watching who is doing the buying.
Insiders Will Send Signals
Investors who want to get in on insider trading can simply buy what the insiders are buying.
There are plenty of lists for "insider buys" put out every week. But those lists don't really tell you the full story. It's simply a bunch of names and numbers of shares.
What's the REAL story behind the buy?
As the editor of the Insider Trader portfolio, I've looked at hundreds of insider buys. Patterns emerge. And I've realized that not every insider buy holds the same weight.
Some insider buys are common, such as when the CEO buys a big chunk of shares after the company has put out bad news. And still others are so rare, that when I see that insider buying, I always buy the stock.
Here are 3 of the specific insiders that I use to find the diamonds in the rough of the insider trades. You should be sitting up and taking notice when they buy.
When These Insiders Buy, It Sends a Strong Signal
1) "The Lawyer Indicator"
The General Counsel (or "Senior Counsel" at some companies) is the company's top lawyer and is considered part of management. Being a lawyer myself, I can tell you that lawyers are, in general, risk averse. (Sorry lawyers!)
Therefore, when it comes to buying company stock, they usually err on the side of caution. They rarely buy shares on the open market unless they're seeing something that is really great at their company.
If you see the General Counsel buying, that is a strong secret signal. I call it "the lawyer indicator." Buy when the lawyers are buying.
2) Buy When There Are Cluster Trades
The insider buys that get the most publicity are the famous CEOs who buy, for example, $1 million worth of shares (or more) in one massive buy.
While these big buys are great, and can mean something exciting is going on at the company, I look for the complete opposite. I look for the "cluster" trades, where a group of insiders are all buying at the same time.
That means, for example, there may be 3 Directors, the General Counsel and the Vice President of Marketing all buying smaller amounts of shares, but all deciding to do so around the same time. This type of cluster buying is rarer than the one big buy by the CEO and sends a powerful signal.
What do they ALL know?
3) Buy If Insiders Are Jumping in For the First Time
There are some insiders who buy company shares on the open market several times a year. Some of the senior insiders, like the CEO and CFO, are usually paid at a higher level than the other senior management and buying company shares isn't much of a hardship.
But for other senior management lower down the chain, like the General Counsel or the head of Human Resources, among others, there may be a different calculation when deciding to buy that $10,000 worth of stock.
It's not unusual to see insiders who have NOT bought shares in many years, if ever, deciding to buy some shares.
The insider who has NEVER bought shares before, but is now, sends a strong signal.
I'm not talking about someone who is new at the company. This would be an insider who has worked at the company for several years and only now has decided to jump in.
What does that insider know that is different from the prior years? Why are they buying now?
And how can you take full advantage of this buying activity?
Where to Find the Best Insider Buys
Anyone can go on the SEC website and get the insider trading information for a company, but it's time consuming to literally search through hundreds of individual companies.
Some investment firms collect the insider buying data and can provide it to you in a weekly list. Have you ever seen one of those lists? The sheer number of companies can be overwhelming.
To solve this problem, our Zacks research team developed a strategy that monitors selected insider buying activity at companies that already show strong earnings and excellent valuations. We do the work of sifting through all the insider buys.
Just a handful of stocks meet the demanding criteria of our Zacks' Insider Trader. Right now, we've narrowed it down to 7 insider buys that make the grade.
One recent move was by a member of the board at a leading brokerage firm. This director stepped in and bought 5,000 shares of the company with $209,850 of his own money, even though he already owned thousands of shares and receives stock as part of his compensation.
He also bought when the stock was trading near new highs - which is another compelling signal. Insiders usually buy when prices are irresistibly low. The stock is a Zacks Rank Strong Buy and has already made double-digit gains since we added it to the Insider Trader portfolio.
Time to Follow the Insiders and Load Up on Shares
Today you are welcome to see this stock plus 6 more insider trades with promising upside potential. Start now and as an added bonus you may download our just-updated Special Report, 7 Best Stocks for the Next 30 Days free of charge. From 220 Zacks Rank #1 Strong Buys, these are the 7 that our experts predict will break out the soonest.
Important note: Access to the Insider Trader portfolio and Special Report is limited. This opportunity ends midnight Sunday, February 11.
See Zacks Insider Trader and 7 Best Stocks for the Next 30 Days now >>
Zacks' value and insider strategist, is Editor in Charge of our Insider Trader.