To be a highly profitable trader, you must have an information advantage. And no one has better information than company insiders Company insiders are good at trading their own stocks because no one understands their companies’ prospects better than them.
You can follow corporate insiders’ trades and profit alongside them, for free. Here at Insider Trading Data we provide:
1. Insider buy/sell ratios you can use to predict the overall market’s direction.Go here
2. Insider trading data for every stock so that you can follow what the smart money is doing.Go here
What is insider trading data
“Insiders” include corporate executives, directors & board members, and major shareholders (shareholders with >10% ownership in the company). These corporate insiders are allowed to buy and sell their own company’s stock. The government requires insiders to report their buy/sell transactions within 2 days of each transaction. This is meant to increase transparency in financial markets.
Are corporate insiders good at trading their own stocks?
Yes! Data proves that corporate insiders are the smart money. Their trades significantly outperform the broad stock market. The following chart demonstrates how much insider buy transactions outperformed the S&P 500 over every 3 month period from 2003-present.
Corporate insiders outperform the broad stock market, particularly in times of economic & market uncertainty (e.g. 2008/2009, 2020). Insiders know things that the public doesn’t and they can evaluate public information more accurately than the general public!
The following chart illustrates how 2 simple insider trading strategies can outperform the S&P 500.
1. Basic Insider Trading Strategy: Every single month, buy the S&P 500 stocks that corporate insiders bought last month.
2. Insider Trading Model: Every single month, buy the S&P 500 stocks that corporate insiders bought last month IF Model #1’s 10 month average is going up OR the S&P 500 Insider Buy/Sell ratio was above 0.3 sometime in the past 6 months.Otherwise, do not buy stocks. Buy TLT (Treasury bond ETF) instead.
Here’s the models’ performance:
1. Insider Trading Model yields an average of 24.5% per year
2. Basic Insider Trading Strategy yields an average of 20.2% per year
3. Buy and hold the S&P 500 (including dividends reinvested) yields an average of 10.1% per year
How do insiders trade
Insiders are useful to follow because of how they trade:
1. As a rule of thumb, insiders buy low and sell high. They are contrarians as a group. Insider buying usually spikes during a market crash and falls during a market rally.
2. Insiders not only buy during a stock market crash, but also buy after a stock rallies if they believe that the stock has more upside potential.
3. Insiders buy stocks when they believe in the long-term outlook of their company. The stocks that insiders buy often outperform the broad stock market up to 1 year after the insider buy transaction!
4. Insider buy transactions are more meaningful than insider sell transactions. “Insiders sell for many reasons, but they buy for only 1 reason”. Insiders may sell because they want to diversify their portfolio, a divorce, etc. These are not valid reasons for you to be bearish on the stock that an insider is selling. On the other hand, insiders buy because they believe in their company.
Is insider trading illegal?
The common perception is that “insider trading is illegal”. This is only true if the information that insiders trade on is:
1. 1. Material information
2. 2. Non-public information
The first rule means that the information must be important to the valuation and operation of the company. Trivial information does not count. The second rule means that insiders can trade on information IF that information is available to the public.
With that being said, many insiders still trade on material, non-public information. It’s often hard to prove that an insider trade is illegal. Regardless of the legality of these trades, insiders are still required to publicly disclose these trades.
How insider buy/sell ratios can be used to predict the broad stock market
Insider buy/sell ratios can be used to predict the broad stock market’s future direction. Aggregate insider data is often more accurate than generic contrarian indicators like RSI, Bollinger Bands, support/resistance, etc.
Looking at the S&P 500’s insider buy/sell ratio, we can see that this ratio is typically very high near market bottoms (i.e. lots of insider buying, little selling). It’s also very low near market tops (i.e. little insider buying, lots of selling).
Hence, a high Insider Buy/Sell ratio is bullish for the overall stock market and a low Insider Buy/Sell ratio is bearish for the overall stock market.