Why Should The Market Pay Heed To Buy Company Stocks By Directors/Insiders?

Insider buying can be considered as buying of a company’s stocks by a company insider. Now a very prominent question which arises in front of us is who can be regarded as a company insider. To explain this, we can say that a company insider is employed by the company or is in a close/fiduciary relationship with the corporation. Thus, an Insider includes the Board of directors, the executive management & officers as well as the employees of the company. There is a very crucial difference between the Insider Buying and Insider trading. While insider trading is done based on the sensitive, non-public information, such as significant information related to mergers and acquisitions, a divestiture, etc. in the stocks of the company, an insider buying takes place considering all the publicly available information in the markets.

Like any other individual, A director has all the right to acquire a company’s shares, provided he acts based on publicly related information. When an insider buys such stocks, it is only since they see an inherent value in the company based on the operations and the business model. Moreover, the buying in the stocks can be direct as well as indirect. A direct buying is the scenario when an Insider by himself buys the company’s stocks. Whereas an indirect buying is a scenario when a relative of the insider or any other person in which the Insider has a substantial interest, acquires shares in the company.

Now, an insider buying in the company can significantly impact the movement in the share prices of the company, both in the short term as well as in the long term. In the short term, it may be driven higher by speculation taking over the long-term fundamentals of the stock. Also, the directors buying into the stocks of the company gives a signal to the market at large that they have got all the confidence in the management of the enterprise. This confidence materializes into investor’s faith in the management and the company’s growth prospects resulting in greater buying taking place in the shares of the company over the long term.

It is also significant to note here that insider buying by a different set of insiders have varied impacts upon the market sentiments. If a board member buys stocks of the company in bulk, then it attracts the attention of almost all the market participants, and sanguine buying can be seen in the stocks of the company. If the senior executives are buying the company’s stocks, then it attracts the investors to assess the company’s plans and growth prospects and hence also considered responsible for the stocks gaining traction amongst Investors.

Now let’s explain a diverse scenario by taking an example Automotive holding group Ltd (ASX: AHG), one of the directors Ms. Andrea Hall, appointed at the office on 3rd May 2018 acquired 10,000 shares in the company on 10th December 2018 as she didn’t have any prior holdings in the company. In the same way, various companies have a requirement to allot shares to their newly appointed directors & executives. Concerning the market indicators, these purchase which is done to full fill a requirement is irrelevant to outside investors and don’t lead to the stocks surging higher. To corroborate this the company’s stock has risen by a marginal 2.72% over the five days as on the 14th December 2018 to close at $1.510.


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