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How to Profit from Corporate Insider Transactions

Insider trading data is nothing new – for years, professional investors and hedge funds have been basing investment decisions on the actions of Insiders. However, this might not be as simple as it sounds as there are many different types of Insider transactions and many different types of Insiders. So, how can one actually profit from all this data? TipRanks recently tested these factors and the results were surprising.

What is a corporate Insider?

Corporate Insiders are company executives, board members, or 10% shareholders of a publicly traded company. When Corporate Insiders buy or sell shares of their own companies, they are required to submit the transaction details to the Securities and Exchange Commission (SEC) within two working days.

Insiders are constantly buying and selling shares of their companies and the information pulled from these types of transactions hold great value to individual investors weighing whether to Buy, Sell, or Hold onto an asset.

SEC Form 4 Example

There are many different types of transactions; the majority of them are uninformative transactions which indicate that an Insider is buying/selling shares for reasons that do not necessarily indicate confidence in the company, for example, an executive that exercisers company options. Therefore, they do not hold much significance.

Informative Buy/Sell transactions are deliberately made by Insiders, thus donning a vote of confidence in the company. Yet, most content covering these transactions do not care to differentiate between the two.

So how can someone profit from Insider trading?

Academic research has shown that Insider actions can provide the most accurate reflection of the prospects for the company, industry, economic sector, or even the stock market in general.

On the whole, Buy transactions are more significant as Wall Street legend Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

In fact, TipRanks found that on average, selling with Insiders generated a negative return of -1.34%, while buying resulted in a +3.66% gain in the 3 months following the transaction.

How to make the most out of Insider activity

TipRanks analyzed the data from SEC forms to find which insider transactions generated the highest return and best overall success rate. Insider transactions were divided into two categories: market cap and position of the insider within the company.

After analyzing and measuring 247,000 discretionary transactions of over 45,000 Corporate Insiders, TipRanks found that Mid Cap ($2B-$10B) generated the highest return with a 4.4% gain and a 66% success rate.

TipRanks further discovered that CFO’s had the best return with a 4.03% profit and a 62% success rate. This was predictable since executives responsible for a corporation’s financial affairs would have the best financial predictions.

However, when TipRanks ran cross examinations to find the best combination, the results were surprising. Of all the possible factors, the winners were the 10% Owners on Mid Cap (with an average return of 8.17% and success rate of 65%), followed by CFOs on Mid and Small Cap (with an average return of 4.57% and a 66% success rate).

The most interesting insight that TipRanks found was that if investors would have followed the transactions of the best performing Insiders (those who historically performed best), they would have generated the highest returns of 5.65% in the 3 month following each transaction.

Access the performance of 45,000+ Corporate Insiders

Insider trading data is available for anyone who wants to use it. Nevertheless, investors need to understand how to profit from this data.

As the world’s first financial accountability engine, TipRanks helps investors make better decisions by providing them with an accurate performance, measurement, and average return rate of over 45,000 corporate insiders covering 6,000 stocks.

Some of TipRanks’ unique screeners show the stocks which exhibit the strongest Buy indicators based on insider trading strategies, and lets investors filter transactions based on their investment criteria.

 Click here to create your own TipRanks account and follow the top experts today!

To learn more about profiting from insider trading, data, and strategies, click here.

Note: All data included in this piece is approximate and is derived from TipRanks’ internal database using a Natural Language Processing  algorithm to detect ratings from reputable websites. TipRanks is not responsible for inaccuracies in the data as all figures are approximate. Do not duplicate, publish, modify or otherwise distribute the material on this site unless specifically authorized by TipRanks to do so.

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