Three dimensions, teach you to use “internal information” in a compliant manner to make money

The original English version of this article was first published on January 15

In this article, I'd like to share with you another way to gain an advantage in trading. This method is related to public information. Most people either don't know they have this information or don't know how to use it to their advantage.

A company insider is a management team, board member, or shareholder who holds at least 5% of the company's shares. They have access to information not available to the public, but they cannot trade based on this information because it is illegal “insider trading.”

Legitimate insider trading is different.

These insiders are allowed to trade based on publicly available information and their in-depth knowledge of the business. In most cases, they have to report their trades to the US Securities and Exchange Commission (SEC) within two days, then their trading information is made public.

If you know how to interpret this information, they can alert you to a great opportunity to trade.

You need to know that not all insider purchases are important; in order to select important information, you need to figure out the following questions.

Generally speaking, you want the highest-level insiders, that is, company executives, such as the CEO (CEO), chief financial officer (CFO), and chief operating officer (COO), to buy.

Often these insiders know more about the details of a company's operations than anyone else, so when the market overweighs the company's stock, they know better than anyone else.

When a company's stock is grossly undervalued, these insiders will also know, and then they will increase their stock holdings.

There is also some other information you can refer to:

Multiple insiders buying almost simultaneously is a good sign.

When it comes to buying a CEO, remember that one of their responsibilities is to make the company look good. Therefore, if you are looking at the recent buying situation of a CEO, only seeing that he has a particularly large position is relevant.

The question of “how much” is relative; it depends on both the size of the company and the remuneration of insiders. What you need to do is figure out if the insider's purchase is significant to them, and if so, it probably matters to you too.

It's not hard to figure this out. Imagine what it would mean to you if you spent a large sum of money to buy stocks compared to your annual salary or net worth.

If the Chief Financial Officer (CFO) of a company with a market capitalization of 30 billion US dollars has an annual salary of 7 million US dollars, for her, spending 50,000 US dollars to buy stocks is insignificant. If you spend 10 million US dollars to buy them, it is significant. This is worth your attention.

For smaller companies, if the Chief Operating Officer (COO) of a company with a market capitalization of $100 million buys shares with a market value of $1 million, or 1% of the company's shares, this is also worth in-depth research.

When board members or majority shareholders buy shares, you also need to figure out the question: Does this matter to them?

The question is simple. Many insiders receive stock rewards or hold stock options; it doesn't matter; what you need to pay attention to is their “open market buying” behavior. When an insider buys stocks on the open market, he buys them the same way we do.

To understand why this information is valuable, let's take a look at a few recent examples:

In February 2017, WBA Co-Chief Operating Officer Ornella Barra bought 124,000 shares of WBA shares, an open market transaction of over $10 million. In 2016, Barra's salary was $7.1 million (including salary, bonuses, and stock rewards), so she invested more money in 2017 than she earned in 2016.

After Barra bought WBA, WBA's stock price soared.

Company insiders need to hold shares in their company for at least 6 months, so if Barra invests $10 million in the WBA and holds it for long enough, she definitely thinks it's a good investment.

In another example, in February 2016, J.P. Morgan Chase (JPM) Chairman and CEO Jamie Dimon bought 500,000 J.P. Morgan shares through the open market. This huge investment was worth $26.6 million.

Dimon's total salary in 2016 was $28 million, so his investment was equivalent to almost a year's income. This is Dimon's vote of confidence in J.P. Morgan Chase. As shown in the chart below, the JPM stock price bottomed out on the day the news of his stock purchase was announced. Up to now, JPM has risen by more than 60%.

Either way, you can find this information for free on many websites.

Insider buying is a good reminder, but don't make trading decisions based solely on this piece of information.

What we can learn from this is that people who have a deep understanding of the company's business (and smart people who can get into executive positions) think that the stock of their company is cheap, and that the stock price may rise even higher.

If you keep a close eye on large-scale purchases from insiders, you may find great opportunities that others haven't discovered. But remember to keep your mind clear by figuring out who's buying, how much they're buying, and how they're buying.

After reading this article, I hope you can add one more trading trick.

(The above only represents the analysts' personal opinions and is not intended as investment advice. (Investments are risky, so you need to be cautious when entering the market.)

Analysts: Ben Morris, Drew McConnell

Compiled by Samantha