Imagine you find an unusually large insider purchase, typically showing a change in holdings of 100%. Looks good, right? Well, it might not be.
One of the few potentially misleading cases of insider trading is buying by a new (recently joined) insider. The main reason for this is that the insider might be required to buy shares and as such the purchase would be involuntary and, hence, of little interest as an investment indicator. Such requirement has nothing to do with the SEC regulations and is typically based on internal company rules requiring its insiders to maintain a certain minimum level of holdings, which they have to fulfill by buying shares in the open market.
While it is impossible to establish if an insider is buying voluntarily or not without having to make a call to the company’s investor relations department (which might or might not help), there is another reason to be cautious of assigning too much value to such transactions. Given that the person buying is new to the company, how much of a true insider would he or she really be? In our “follow insiders” investment philosophy, we are really after the people who are running the company and know it in and out – better than anyone else. Following someone who has just recently joined does not align well with this approach.
Watch out for the “New Insider” indicator next to insider name — the system marks such transactions automatically in real-time to help you spot them at a glance.
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