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Insider transactions

Insider transactions most often refer to and include the purchases and sales of equities by the executives and board members of the company in question.

Contents

Expanded Definition

Insider buying and insider selling each have their own sections here on our Motley Fool Investing Wiki -- this page mainly serves to aggregate them and other resources dedicated to studying and understanding insider transactions.

By contrast, insider trading is a term often used to denote illegal transactions made by corporate insiders, illegal because the trades are made with special knowledge that the market should be privy to but is not. We also have a page on insider trading, therefore, available at the link provided just above.

Also, for interesting insider transactions of popular public companies, search Fool.com for "eye on insiders" and you'll find our ongoing series reporting on and tracking some of these.

Results from studying insider transactions

Dr. H. Nejat Seyhun wrote Investment Intelligence from Insider Trading in which he reported the result of a study covering 21 years of insider trading. In the August 2004 issue of Motley Fool Hidden Gems, Tom Gardner interviewed Dr. Seyhun.

Among other results, Dr. Seyhun noted the following:

  • Top level executive trading is most information laden. In general, it runs CEO > officer > board member.
  • Insider buying is much more predictive than insider selling. Option exercising adds a lot of noise. Buying is more bullish than selling is bearish.
  • The direction of recent price movement and the action, together, are more informative than the action alone. Buying into a rising price (bullish) or selling into a declining price (bearish) is much more informative than the opposite (buying into a decline, selling into a rise). In particular, selling into a rising price is more likely to be the closing of an earlier position instead of a bearish signal.
  • Number of shares is important. As the number increases to 10,000 or to 100,000 or so, it is informative. Above 100,000 or so and below a few thousand, it is not nearly as informative. This ties into who is doing the trading.
  • Insiders tend to invest rather than trade. They buy and sell based on their three- to five-year assessment of the business and industry, not on how next quarter or next year will turn out.

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