Are insider stock purchases really positive for the stock?
Are insider stock purchases really positive for the stock?
It is a long-standing stock market adage: when a company's management buys shares, it is a positive sign. Intuitively, this feels correct: a company director or manager knows their company best and is therefore best placed to assess whether its shares are overvalued or undervalued. So if they use their own money to buy additional shares, this should be a positive indicator for investors. But is this also true when hard figures are taken into account?
An interesting study by the Wall Street Journal examined 1,400 insider purchases made by managers of S&P 500 companies. Two things became clear from this study:
1) Insiders often buy after the share price has fallen sharply. There is a logical explanation for this: it is a way for company managers to send a signal of confidence to the market: "The share price has recently been punished, but we still believe in it!"
2) On average, the share price rises by 2% in the month following insider purchases. After that, the effect wears off. Of course, averages do not tell the whole story: in 39% of cases, the insider's investment is at a loss after one month.
In summary: insider purchases are indeed a positive signal. However, the effect should not be overestimated. And for a long-term investor, it is certainly 'nice to have' when insiders are on the buying side, but it is certainly not a sufficient condition to blindly buy 'because an insider has also bought'.
Source: https://www.wsj.com/finance/stocks/is-it-really-a-good-sign-when-executives-buy-their-own-stock-we-ran-the-numbers-2655b232?mod=Searchresults&pos=1&page=1
