It can be challenging to know how to approach the stock market. Deciding which companies to invest in and how much to invest are typical decisions that the average investor has to make. However, following insider investments can be a way to make these choices easier.
Following insider investments utilizes business peoples’ investments to inform common investment decisions, and keeping track of how insiders are investing can give insight into the trends that may emerge in the stock market. Keep reading to learn more about legally following insider investments and how this practice can help influence your investment strategy.
What Is Insider Buying and Selling?
Insiders are defined as a 10% stockholder or anyone within a company who has exclusive company information because of their role or connections. Insiders are commonly on the leadership team (such as directors and officers) of a company that engages in public trading of their stock.
These company employees are allowed to sell company shares and buy other stock on behalf of the company. This is where the terms “insider buying” and “insider selling” come from, as they refer to an individual on the “inside” that trades company stock.
Insiders are often more knowledgeable than normal investors because their careers are based on knowing where their company and their industry are headed. Thus, they can be important people to follow to get insight into how to make investment decisions.
Following Insider Investments Is Legal
Keeping track of insider investments is completely legal. In fact, it’s mandated that this information is publicly available. However, this is not to be confused with insider trading.
Insider trading is an illegal practice in which company insiders buy and sell stocks during periods when they have exclusive access to company information that is not available to the public. This can give them an unfair advantage in trading. Many companies will enact earnings blackout windows during this time, which stops insiders from trading. This prevents any penalties for intentional or accidental insider trading by company insiders.
While insider trading is illegal, it is completely acceptable for investors to track insider buying and selling. Insiders are often still quicker to make investment decisions than the average investor, which can give you an early idea of which companies you may want to invest in.
Why Invest?
There are many reasons why people may choose to invest. For insiders, investing is about building wealth for the company they work for, and for themselves as a stakeholder or employees. For other investors, investing is usually about building personal wealth.
Overall, investing is a good idea because your money will build over time. Sometimes people invest to plan for retirement or achieve particular goals related to their wealth and assets. People may also have ideas or ventures they want to pursue, but need money to do so. Investing is an important part of financial planning and can help individuals and companies alike grow their wealth over time.
Why Is Information About Insider Investments Valuable?
Insiders tend to be more knowledgeable about their companies, industries, and the stock market as a whole. They often make investment decisions earlier than other investors, which makes them key players in the stock market. Following insider investments can give you a good idea of which companies are worth investing in before the general public jumps on the bandwagon, allowing you to “get in” or “get out” of an investment at the best time.
It’s also important to note that insiders are required to report information about the stock they buy and sell in a timely manner, usually in two business days. Since insiders are usually quicker than the average person in making investments, this information will likely be available in time to be helpful in informing your own investment decisions.
The knowledge of insiders and their speed in making investments makes them good resources for building your own investment strategy. Tracking insider investments is completely legal and all the information you need is available on public databases.
What Is Involved in Making Investment Decisions?
There are multiple components that make up a good investment decision. While some factors depend on your personal investment goals, others can be influenced by trends in the stock market. Here are some of the key parts of making an investment decision.
Level of Risk Involved
Different investments have different levels of risk based on how much you’re investing and the state of the stock market. Tracking insider investments can be a way to get an idea of the risk involved in investing in a certain company. Large insider investments likely indicate that there is less risk in their investment.
You may want to follow suit and make a plan to invest in the same company. On the other hand, insider investments that are smaller may indicate that there is more risk involved in the investment. The risk may not pay off, so the insider is only comfortable investing a small amount in the company.
Return on Investment
Ultimately, people invest to get a return on their investment and make money. Just like you, insiders work to build a strategy to benefit from their investments. By following insider investments, you can study their choices and learn about which companies are most likely to give you a return.
Insiders tend to have a higher level of knowledge about the stock market and its trends, particularly when it comes to their industry, so their investments can be a good inspiration for creating your own strategy.
Deciding How Much to Invest
A major part of making an investment decision is deciding how much to invest. This factor is connected to the risk involved in your investment, as you’ll want to consider how much risk you’re taking when deciding how much you’re willing to lose.
Insider investments can show you how much insiders are comfortable investing in different companies. It can be a good idea to use this knowledge to help determine how much you want to invest in various companies.
How to Track Insider Investments
It’s clear that there is value in following insider investments. Here are a few things to keep in mind as you try to utilize this practice in your investment strategy.
Choose the Investors You Want to Track
You should choose which insider investors you want to track. Some people track insiders that make big purchases, while others track insiders that make smaller purchases but who are seen as smarter investors. You may want to do some moderate research into the investors you plan to track to learn about their investment history.
You should learn whether their previous investments turned out to be good decisions or if they have a history of bad investment choices. Ultimately, you’re looking for experienced insider investors who have a good track record when it comes to getting returns.
Find a Database
Insiders are required to report information about the stock they buy and sell on public databases. The main database is the U.S. Securities and Exchange Commission (SEC) EDGAR database. This is the main public database where insiders report their investments. However, this may feel overwhelming for some people because of how much investment information is available on this database.
If this database is too overwhelming, there are other financial websites that keep track of the stock market and share information about insider trading.
Analyze Insider Investments to Inform Your Own Investments
Analyzing insider investments is a key step in using them to help your investment strategy. Once you’ve decided which investors you want to track and found a database or website that works for you, you’ll want to look over the information you found.
Are there common investments among different investors? Are there any investments that stand out because of how big the stock purchase was? These are transactions to pay attention to so you can determine how to form your own investment strategy.
Once you’ve collected information, it’s important to look over what you found to search for patterns and figure out which investments are significant to your plan. Then, use the insight provided by these investments to determine where you want to invest and to what degree.
Build Your Investment Strategy
Insiders tend to be more knowledgeable about the happenings of the stock market’s trends and the different industries they are associated with, so their investments can be taken as valuable information. Keeping track of insiders’ investment decisions can be a great way to frame your own investment decisions if you do your research.
If you want additional help in building your investment strategy, contact us at Alpha Wealth Funds. We can help you analyze your current financial situation, provide guidance as you invest and grow your wealth, and help you create a plan for the future. Sign up today for a free introductory consultation.
Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence
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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk, including the loss of principal.