Insiders, by law, are required by the Securities and Exchange Commission (SEC) to file a Statement of Changes in Beneficial Ownership of Securities (Form 4). Form 4 is accessible by the public.
Example Form 4
By tracking these insider transactions, investors may discern valuable information about a company’s prospects. Legitimate insider buying has been used as a sign of stock-price appreciation. Of course insider stock trading activity shouldn’t be the sole technical indicator when deciding to buy or sell a stock. But, insider buying activity may be a good starting point to further investigate a company, either by analyzing the fundamental data of the company or by studying other insider trading related matters such as the stock trading history of the insider, the type of insider (officer or beneficiary owner) etc.
Does Insider Buying Alone Always Predict That the Stock Will Rise?
The answer is no. Insiders can overestimate the value of their special knowledge or be overly optimistic about their own firm’s chances of success. So interpreting the knowledge gleaned from SEC Form 4 filings can be tricky. The questions remain:
How much information is in these filings?
Which are the salient numbers?
How can they be best extracted?
These are questions that are easier to ask, than answer. Many of the Form 4 filings involve purchases as part of compensation (such as the exercise of options). Often, these are more related to liquidity needs than speculation on the company’s performance. Open-market purchases, however, require insiders to take their own money and purchase stock on the open market. “Skin in the game” makes some believe in the more predictive power of this factor.
Although there have been studies that show that insider purchases are profitable, merely imitating insiders still requires plenty of work on your side. You can’t simply buy all stocks with insider purchases and expect to beat the market. There’s much more to a strategy than follow-the-leader. You have to pick WHICH leader and hope you made the right choice.
If You Can’t Beat ‘em, Join ‘em.
Using insider buying information is just one step towards seeking better outcomes from your investments, but your approach should be systematic, analytical, and repeatable, in order to succeed over time.
The Direxion All Cap Insider Sentiment ETF (Ticker: KNOW) provides investors with access to stocks that corporate officers, directors, and shareholders who own more than 5% of each S&P 1500 company’s stock, are accumulating. But that’s just the beginning.
The key benefits of KNOW’s strategy:
Allows investors to identify and participate in stocks that corporate insiders are accumulating
Offers access to a quantitative, rules-based index approach to equity investing
Focuses on insider transactions and analyst ratings to determine weightings within the Index
Allocations to sectors within the index can vary significantly from traditional cap-weighted equity benchmark weightings
Financial Advisors, access additional information about insider buying.
Direxion Shares are bought and sold at the market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally determined) and do not represent the returns you would receive if you traded shares at other times. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV.
Some performance results reflect expense subsidies and waivers in effect during certain periods shown. Absent these waivers, results would have been less favorable.
The Fund is non-diversified and include risks associated with concentration risk that results from the Fund’s investments in a limited number of securities. The Fund may at times use derivatives such as futures contracts, forward contracts, options and swaps which could subject it to market risks that may cause price fluctuation over time. Derivatives may expose the funds to additional risks that it would not be subject to if it invested directly in the securities under lying those derivatives, such as counterparty risk. Increased portfolio turnover may result in higher transaction costs and capital gains. For other risks including counterparty risk, tracking error risks and specific risks of exchange traded funds, please read the prospectus.
Distributed by: Foreside Fund Services, LLC. Destra Capital Investments acts as a sub-distributor for The Direxion Insider All Cap Sentiment ETF (Ticker KNOW).