One of the most practical strategies to choose where to invest is to follow the movements of the insiders and replicate them in your investments.
The insiders (literally, those who are inside) are CEOs (managers), senior executives of a company, or their owners, provided that they are involved in management.
An executive of a company is legally prohibited from taking advantage of confidential information to acquire shares. For example, if you are going to sign an important sale that has not yet been made public and the manager or CFO makes strong purchases just before publication.. Because it is illegal.
The insider who has used that information can be prosecuted and convicted.
However, that does not mean that an insider cannot buy shares of your company; In fact it is done very often.
A manager or a senior manager, of course, has tons of information about your company’s products, future launches, and sales forecasts.
That does not mean that they always succeed, because sometimes the forecasts are not fulfilled; But they do have more quality information than other investors, which is why they usually get their share purchases right.
And the good thing is that, being personal involved in the company, such purchases should be made public.
Can we take advantage of this circumstance?
Yes, but we must qualify: not all purchases or all insiders are equal.
As a guide for following insiders, you can use this little guide:
Guide to follow insiders: the 7 rules
1- Follows active insiders, not passive: Inserts often make periodic purchases, increasing for example in a monthly percentage their capital in the company. These purchases follow a plan, and are not usually indicative that the action will rise. It is best to look at active, non-automatic purchases.
2- Shopping, not sales: We must pay attention to purchases, not so much in sales. Although an insider selling stocks may be a sign of future problems in the company, it does not have to be that way. Researchers often say that shopping is more informative than sales.
3- Multiples insiders: it is proven that it is more effective to follow an insider if there are more people within the company who are also buying. A situation of consensus in the purchase of shares within the company is of great value.
4- Better small companies: it is proven that small caps insiders are more effective than those of large companies. In small caps, insider purchases outperform the market by 6.2%, while insiders from large firms exceeded only by 1.7%.
5- Best with positive surprises: When a company reports quarterly profits that exceed expectations, stocks rise, on average, throughout the subsequent year. Therefore it is better to match the purchase of insiders with this type surprises in the results
6 – Attentive to the companies “accessible”: From time to time, appear in press reports of fusions of companies of a sector. In these cases there are usually more likely candidates to be acquired. Well, it is convenient in these cases to observe the movements of insiders. If there are purchases is because there are probabilities of a good supply and therefore future rebounds of the stock.
7- Better shopping: Let’s follow the money: the greater the purchases, the better. 10,000 shares per transaction may be an appropriate threshold.
With these guidelines, it is very possible to achieve similar benefits to the insiders, and therefore beat at 6% to the market.
Of course, they are not an infallible strategy. In fact, it is a good idea to combine it with chartist techniques that help you choose the best time to buy.
But in the long run, even without using other criteria, this strategy can outperform many other more complex techniques.
You may also like to read : Testing Profitable Investments
Where to find free information
Being public information, there are services that inform you of the activity of the traders, some of them for payment.
In my case, I usually use a page that gives quite complete information and is also free. As usual, it refers to the North American market; Finding information on the European market is always much more difficult.