Insiders Are Selling Their Shares!
What Does This Mean?
And What Should I Do Now?
When insiders, particularly officers, directors and owners of large blocks of stock (5% or more of the total shares issued and outstanding) are suddenly starting to sell off their shares of stock in a publicly-traded company, especially one in which you have an investment, before you take action, extend your very best efforts to try and determine what the underlying reason for the selloff is. Depending upon that reason (or reasons), you may wish to either: follow suit and liquidate some or all of your holdings; just sit tight and maintain your position; or actually purchase more shares. While this article does not provide financial, tax, investment or legal advice, it may help you in making a more-informed decision in terms of your own investment tactics or strategy with respect to your investment in that specific company. Since we at GEI Consulting are extremely imaginative, we'll refer to the subject company as “Company X”.
There are a host of reasons why significant shareholders may be selling off their shares in Company X, and an outline of some of the most prevalent possibilities are discussed below:
==+ They have come to the end of a statutory, regulatory or contractual stock holding period, and they are selling off some of their holdings to establish some liquidity – this is, of itself, harmless and is generally acceptable, especially in the second or third year following an IPO, or after a year or two of having commenced a C-Suite position in a more-established company.
==+ They are either retiring or contemplating retirement (they are at an advanced age) to pursue personal interests, and wish to 'cash out' to enjoy the benefits of a financially-substantial departure from a successful career.
==+ They are selling off shares and either reinvesting in Company X or lending the post-sale proceeds to Company X, presumably because Company X is illiquid or is accumulating losses. This type of activity can either be interpreted as admirable and positive heroics, or as a prelude to a death knell in the event that the tight cash situation is not just temporary or seasonal.
==+ If they are selling off shares (which they might have gotten very inexpensively early in Company X's evolution, or through the exercising of options or warrants) and using the proceeds to buy additional shares, it generally means that they believe that the stock is undervalued and is due for an increase through a market revaluation.
==+ If they are selling off substantial numbers of shares and not reinvesting proceeds in Company X, it generally means (barring an individual holder's personal financial hardship) that they believe that the stock is overpriced and is headed for a valuation adjustment in the downward direction.
Depending upon the circumstances (some of which are set forth above) and the underlying reasons, take action appropriately.
In order to get information on these substantial trades by influential shareholders, some good sources are these:
Generally speaking, the pundits (they generally like to call themselves that) tell us that when it comes to aggregate insider buying and selling, the following general rule applies [although in taking a close look at the individual circumstances involved as described above in this article, the general rules are possibly a gross oversimplification]:
When the buyers outweigh the sellers (in terms of number of parties and aggregate volumes), insiders are generally bullish (optimistic) about the short-term prospects of Company X;
When the sellers outweigh the buyers (in terms of number of parties and aggregate volumes), insiders are generally bearish (pessimistic) about the short term prospects of Company X.
Also, in the interest of keeping our nomenclature crystal clear:
"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC.
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
Thank you, as always, for reading me.
Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog
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