The Securities and Exchange Commission defines an insider as a director, company officer, manager, or owner (either individual or institutional) who owns more than 10 percent of a company’s stock—specifically stock that grants voting rights. Relatives of these individuals are also included in the definition of an insider.
How to Track Insider Ownership
- Check SEC Filings
- Read annual reports
- Check Institutional Holdings Reports
- View the Investor Relations Site
- Refine Search Parameters
- Interpret Results
Insiders generally have a good idea of what’s going on at a company before it becomes public information. As such, they have the opportunity to act on that information in terms of buying and selling stock in that same company. If this is done and involves a breach of company trust, such as sharing material, non-public information with a friend who then buys or sells company stock accordingly, this becomes a white-collar crime known as insider trading.
However, if insiders buy or sell company stock based on information that is public knowledge and they file the required forms with the SEC within two days of their trade, this is a legitimate and legal action. It’s also one that other investors can benefit from, legally.
It’s good for stock market investors to keep track of insider ownership and see what type of insider buying and selling is going on in the markets. This can provide investors with great tips about when to buy and sell stock.
For example, if an inside owner buys several thousand shares of company stock, it’s a good indicator that they believe or know something positive is about to happen, which will likely increase the stock’s price. In other words, they have a bullish perspective on their own company. If they sell a large volume of shares, it may indicate that they believe or know something negative is about to happen, which will decrease the share price. This means they have bearish perspective of their own company.
What is Insider Ownership?
Many people buy and sell stocks. Some investors buy and hold stocks as a long term investment, and that certainly includes the executives, managers, and owners of companies.
These insiders are allowed to buy and sell shares of stock in the companies they own or manage. After all, stocks are publicly traded securities, and the stock market is open to everyone.
That said, these insiders are in a unique position, being both consumers with the right to buy and sell stocks in a free market, and company insiders whose decision making is responsible for the financial health of the company, including its stock prices.
As you can imagine, that has the potential to create a conflict of interest. In times past, insiders have taken advantage of this position to perform unethical trades.
For example, an owner might sell their shares of company stock, use their influence to drive a company into the ground (or at least it’s public perception), then load up on that same stock again while prices are low while expertly guiding the company back to a place of consumer confidence and soaring stock prices. In times past, actions like this were technically not illegal, but since this behavior erodes consumer confidence in the markets, the SEC was created to hinder and prevent this type of abuse of insider ownership.
Insiders must own at least 10 percent of the voting shares of a company. Typically, the common stock bought and sold on the stock market are the share types that grant voting privilege. What this means is that it is possible for almost anyone (should they have the cash, and should the requisite number of shares become available) to purchase a sizable number of shares and become a company insider themselves. Usually someone with a 10 percent share of directorial ownership in a company will have some say in how it’s run, or at the very least, most likely know more than most about how the business is doing.
This knowledge can be very beneficial for the average stock market investor.
How to Track Insider Ownership
Check SEC Filings
Insiders are required by the SEC to file certain forms within two days of placing a trade that involves their company stock. You can use the SEC website to track these forms by using the EDGAR search engine. It’s estimated that nearly 3,000 forms are filed every day. This is good because it means that the SEC takes insider ownership very seriously. Even small amounts of insider buying must be accounted for.
Read annual reports
If you own stock in any companies, you likely know that these companies issue annual reports. Oftentimes these reports contain a fairly glossy section showing what the company has accomplished in the past year. Behind the glossy charts and pictures, however, is a detailed report with numerical breakdowns of detailed information, like the salaries of corporate officers, expenses, projections, and a list of individuals involved in guiding the company.
Take a look at these lists and keep these people in mind if you want to know what company insiders are doing. Management and ownership may change year by year, so it doesn’t hurt to take a look periodically and see who you should follow in terms of insider ownership.
Check Institutional Holdings Reports
Remember, insiders can be a company or business entity as well, as long as they own 10 percent or more of a company’s voting stock. This means that banks, mutual funds, investment firms, and other companies can also fall into the category of insider ownership, and you can benefit from following what they do.
These institutional investors are also required, just like individual corporate insiders, to indicate beneficial ownership of outstanding shares to the public. This means an individual investor can see what these institutions are doing.
Many people are interested in knowing what stocks Warren Buffet is investing in. All they need to do is take a look at the stocks listed in Berkshire Hathaway’s Portfolio (this is the international conglomerate of which Buffet is CEO). Much like watching the actions of an individual insider owner, keeping abreast of what institutional inside owners are doing with their stock is also an important indicator to follow. These reports are filed with the SEC and the markets (like the NYSE and NASDAQ) and often reported by financial new outlets.
View the Investor Relations Site
Every company that allows an individual shareholder to purchase company shares of stock will have an investor relations site. Here you can browse through proprietary information, such as stock split history, and statements of written agreement with respect to the subject matter of corporate finance.
You can also read bios of all the board members, like the president of the company, CEO, and other chief executives. You can even see how many total shares of stock they have if the business has provided links to SEC filings on the investor relations site, without having to write down the names and do the research yourself. Depending on how easy the investor relations site is to navigate, it could become a one stop shop for research in regards to inside stock ownership.
Refine Search Parameters
When looking at the SEC website and examining a company report, you can face an information overload that steers you away from the information you actually need to find. Limiting your search to a certain time frame can help you cut irrelevant information out of the picture, as can filtering the results by percentage of ownership.
If there are several inside owners of a company, it may be difficult or time consuming to track all their market behaviors. Perhaps refining your search for the ones with the most equity or control over a company will make it easier to benefit from following the actions of these inside owners.
One you’ve tracked down insider ownership, it’s time to interpret the results of your findings. This may take a little observance over time to see what these inside owners do.
Have they increased their ownership shares recently? Have they sold some of their stock? As previously mentioned, (generally speaking) inside owners buying stock is a good sign about the company, and inside owners selling stock is a sign that perhaps, you too, should unload your shares (or that you may soon be able to scoop up lots of shares at a lower price).
Keep in mind that this is not always a guarantee. An insider owner may be selling shares of stock because they need liquidity for another business venture, not because they have foreboding feelings about their own company. This is why it can be helpful to have check financial news reporting outlets that tracks legal insider trading. These insider ownership tracking experts can use their experience and vantage point over the markets to paint a more accurate picture of what is happening.
What is a Good Insider Ownership Percentage?
There is no right answer to this question. It really depends on the market, the individual, and the company.
At one point, Bill Gates owned five percent of Microsoft’s stock shares, and Berkshire Hathaway owned eight percent of Coca-Cola’s shares. This doesn’t seem like a lot. Shouldn’t they have more confidence in the companies they own or are deeply involved with?
As the saying goes, it’s not wise to put all your eggs into one basket, even for Bill Gates or Warren Buffet. Berkshire Hathaway, for example, owns shares or has owned shares in dozens if not hundreds of companies over the years, ranging from VISA to John Deere to Amazon to Johnson & Johnson. In fact, an eight percent share of ownership in Coca-Cola stock constitutes a sizable percentage of Berkshire Hathaway’s institutional portfolio, and is a sign that the carbonated beverage company is a probably a solid investment. If Berkshire Hathaway increased their shares, this would probably be a sign of their confidence, and if they decreased them, it could be sign that it might be time to move on, or at least reduce the number of shares in your portfolio.
Another indicator of good financial health can be high insider ownership. If a company has large insider ownership, that indicates that pretty much all the important principals of the company have faith in the direction of the business and the company’s stock as an investment vehicle.
It’s one thing for a handful of company insiders to own shares of company stock, especially if it was transitioned to them generationally, but if a sizable number of people at the company are company insiders in respect to stock ownership, they believe their own commercial purpose is stronger than other companies in which they could buy stock for lawful purposes. And that’s worth noting for individual investors.
Insider Ownership Tracking Can Give Investors Valuable Information
Insider ownership is defined as a person or entity having a 10 percent share or more of company stock that grants voting rights.
These executives, managers, owners, or even relatives of individuals who are insiders have some measure of control over how a company is run, and usually a good sense of how things are going there even before it becomes public knowledge.
Investors or traders who buy or sell stock can research who the insider owners of a company are and follow their trading behavior, piggybacking off their trades to make stock market decisions with a positive financial outcome.