Follow the Insiders

Investors everywhere are always trying to find that edge to pick stocks that will outperform the market, stocks that will provide consistent, stable, long-term returns. One indicator used by smart money investors can help you make more money now and for the future.

Executives and directors at companies tend to have a good idea of the day-to-day operations and the state of the businesses which they run. They also tend to have large stakes in the companies, whether as a key employee rewarded with stock grants or as a board member who is simply a large shareholder.

Insiders can also buy and sell stock in the market and do so for various reasons. Thus, watching the market actions of these key employees and directors can be a great way for investors to look for companies whose executives are bullish on the company.

Insiders and large shareholders have to disclose transactions within a few days of trading, as required by the Securities and Exchange Commission, in what is known as a Form 4. Many market data sites track the number of net insider buys, the difference in buys and sells from insiders, and report the data as a total number.

How to Profit

Look for stocks that have strong net insider buying, especially so in recent periods (look for strong buying in say the last three months). If insiders are buying a given stock in large amounts in a short period of time, academic research has shown that these stocks tend to outperform.

Further, insider selling can be a negative sign for a company. A classic tale of insider selling precluding a collapse of a company was that of Borders, the failed book retailer, whose insiders sold large amounts of stock just before the company began its collapse to insolvency.

Obviously, insider buying and selling is just one of many ways to look for stocks and should not be the only way that investors value stocks. However, adding the tool of following the leaders to an investors arsenal can help to boost returns in the long run.