Quality tools can last you a lifetime…
Even a basic set may be enough for you to do the job well, day in and day out. But you’ll have limitations…
A master craftsman can tell you that certain jobs require specialized tools. Having these tools at the right times – and knowing how to use them – can prove extremely valuable.
Trading is no different…
If you’re a trader, you should have all the basics in your “toolbox”… the tools that allow you to plan and execute your trades well every time.
These are things like position sizing, stop losses, and a variety of trading techniques (including buying stocks, trading for income, and short selling).
You can make a lot of money in the market by using these basic tools well.
But one of my goals is to show you how to use a variety of specialized tools, too…
The more specialized tools you add to your trader’s toolbox, the more opportunities you’ll have to make money… and the more you’ll recognize certain opportunities are great, rather than just good.
Today, I want to show you another way to get an edge in your trading. It involves using public information that most folks either don’t know about or don’t know how to use to their benefit…
It’s called “insider buying“…
Corporate insiders are a company’s management team, directors, or shareholders who own at least 5% of a company. They have access to information that the public doesn’t. But they can’t trade based on that information. That’s illegal “insider trading”…
Legal insider trading is different…
These same insiders are allowed to trade based on information that has been released to the public… and based on their deep understanding of their businesses. In most cases, they have to report their trades to the Securities and Exchange Commission (the “SEC”) within two days. Then, their trades become public information.
This information can alert you to great trading opportunities… if you know how to interpret it. We’ll just focus on insider buying today.
You see, not all insider purchases are significant. To sort out the ones that are, you need to ask a few questions…
The first is: Who’s buying?
In general, the best insiders you want to see buying are the ones at the top of the company… like chief executive officers (CEOs), chief financial officers (CFOs), and chief operating officers (COOs). And multiple insiders all buying at around the same time is a good sign.
These insiders (usually) understand the details of how their companies run better than anyone else. So they know better than anyone else when the market punishes their stocks too severely.
When their stocks are deeply undervalued, these insiders know it… And they can load up on shares.
The second question to ask is: How much are they buying?
The question “how much” is relative. It depends both on the size of the company and on the compensation of the insider. Your goal is to figure out if the purchase is significant to the insider. If it is, it may be significant to you, too.
This doesn’t have to be too difficult. Think about what a big stock purchase would be to you, relative to your annual compensation or your net worth.
If the CFO of a $30 billion company makes $7 million a year, to her, a $50,000 purchase is insignificant. A $10 million purchase is significant. That should get your attention.
On a smaller scale, if the COO of a $100 million company buys $1 million worth of the stock, that’s 1% of the company. It’s worth looking into.
When directors or major shareholders buy, you need to answer this question, too… Is it significant to them?
Now, the third question… How are they buying?
This is an easy one. Lots of insiders are awarded stock or have stock options. This isn’t significant. You want to look for “open market purchases.” When an insider buys shares on the open market, he’s buying just like you or I would.
Insiders make major open market purchases for only one reason… They believe their stock is undervalued and is likely to rise.
To see why this is valuable, let’s look at a real-life example…
In February 2016, JPMorgan Chase (JPM) Chairman and CEO Jamie Dimon bought 500,000 shares of his company’s stock on the open market. That’s a huge, $26.6 million investment.
In 2016, Dimon earned about $28 million in total compensation. So his purchase represented nearly a full year of earnings. Not only that, but corporate insiders need to hold on to their shares for at least six months. It was a big vote of confidence for the stock.
As you can see below, shares bottomed the day his purchase was declared and are now up more than 64%…
You can look for insider buys in two ways. You can look for recent buys, then dig deeper on the ones you find interesting. Or you can look for insider buys in a specific company. Either way, you can find this information for free on a lot of websites, such as GuruFocus, Yahoo Finance, or Insider Monkey.
Insider buys can be a great alert. But don’t base your trading decisions entirely on this one piece of information.
They tell you that someone with a deep understanding of the business (and the smarts to get to a top position) thinks the stock is cheap… and may be ready to move higher.
If you keep an eye out for big insider buys, you’ll likely spot great opportunities that others don’t. Just remember, ask who’s buying, how much are they buying, and how are they buying… And you’ll be in good shape.
There you have it… A new specialized tool for your trader’s toolbox.
Source: Daily Wealth