The Market Guide Insider Trading table gives you an important
window into the expectations of those who, presumably, know a
company best; corporate executives and directors.
Insiders owning a significant piece of the company is generally a
positive sign. It often indicates that
management's and shareholder's objectives are closely aligned, and
that the officers and directors will diligently attempt to maximize
shareholder value. However, when insiders own a very large and
controlling percentage of the company, they may not feel responsible
to outside shareholders. This is particularly visible in companies
with multiple classes of stock, with insiders/management retaining
voting control over the company. In this case, outside shareholders
will have little influence on corporate policies and decisions, and
management's interests may not be aligned with public holders. To
avoid this risk, look for companies where there is only one class of
stock owned by everyone, where management and directors own a
meaningful amount of stock, and in which management is partially
compensated with stock options.
Insider trading can serve as a useful gauge of sentiment on the
part of those who know the company best. There are differences of
opinion regarding what, if any, conclusions can be drawn from
insider selling. Some might see this as a statement of bearishness
on the part of corporate insiders. But we do not suggest jumping to
such a conclusion. Insider selling can, and often does, reflect
little more than a desire on the part of key employees to convert
part of their compensation (e.g., stock options) to cash for other
uses. It could also represent efforts on the part of executives to
diversify their stockholdings (this being a generally prudent
approach to personal financial planning). So there could also be any
number of personal reasons why insiders may wish to raise some
cash.
But as ambivalent as investors should be toward insider selling,
buying by insiders is a different story. Here, people are putting
new money into the stock of their corporations, and possibly,
reducing the diversification of their personal assets. It's highly
unlikely that any insider would do this unless he/she had a
favorable assessment of the company's prospects. This isn't a
foolproof indicator of what lies ahead for a business; even insiders
can assess matters incorrectly (especially in large corporations,
where an individual may not be intimately familiar with areas of the
business in which he/she does not work). Even so, insiders are
closer to the business than are outside investors and professional
analysts. Hence one could reasonably expect that their assessments,
although not infallible, are at least worthy of careful
consideration.