Trading techniques... directors’ dealings

Insider trading, buying and selling shares based on information not generally available to the public, is illegal. Company executives may need to sell shares for legitimate reasons, however, such as raising cash or diversifying their portfolio. Most jurisdictions thus allow directors to buy and sell stocks under closely monitored conditions. Such sales are published by the authorities (you can find the information on many of the major share-trading websites).

Many traders believe that such “insider” transactions provide a good indication of what corporate insiders really think about their company.

After all, if the CEO is dumping their shareholding, then they clearly don’t think that their shares are worth holding onto. On the other hand, if they are willing to put their own money into a company, it is likely to be a sign that they are confident about its future.

However, other traders argue that there are so many legitimate reasons why company insiders could sell shares, such as to diversify their portfolio or pay their bills, that such transactions are meaningless. Since the 1980s studies have shown that insiders’ purchases have a positive impact on subsequent returns. A 2011 study by the European Business School, which found that between 2002 and 2009 “high-conviction” shares in several European countries, where insiders bought shares, outperformed the market. “Low-conviction shares”, where insiders sold stock, lagged the index.

A study by Florida International University and Mississippi State University in 2017, looking at US shares between 1986 and 2014, found that buy signals provided a stronger harbinger of healthy returns when several insiders bought at the same time.