When the insiders are buying

When you have the directors of a company buying their shares, it can only mean one thing. That they find their company is undervalued and so they buy their shares. Its a very good sign whenever directors buy shares in their company, but an even better sign when the lower-end employees buy shares as well. Its a requirement that public companies' directors give notice whenever they buy or sell shares.

If there's anyone that knows a company inside out, its the company directors. They run the business. They know what the prospects for the company in the future are, whether it is doing well currently, whether competition has stiffened up lately, and if they are likely to survive in years to come. They know their companies really well. And when they believe that the sharemarket is undervaluing their company, they will buy the shares. Most of the time, the directors are right and will make alot of profit from their shares. A director who buys the shares of their company, and risking their money on something they know too well, it means there is still value to be scrapped from the company.

When the chairman of a company is buying, it could be less meaningful. But when the vice-chairman buys, it is more meaningful. Its a positive indication that you can't go wrong. Heck, its even better if the employees buy them. Then, you have the confidence of the people working in the company itself that they believe the same as you do.

When directors are selling, its not necesarrily a bad thing. When they are, it could mean alot of things. That they need the money for a house renovation, paying their kids' tuition fees or to go on a holiday. So its wise not to base our preference for shares based on whether directors are selling. Sometimes though, it could be a bad thing. When all of a sudden, all the directors are rushing to sell their shares in big amounts, you know that the future prospects of the company can't be good.

There is also perspective that is important. Sometimes, directors do not buy at all when their shares are really undervalued. That is because of different perspectives. Sometimes, for those who have worked in an industry which has been around for a long time, and when you interview them about the company prospects, they might just reply you "looks alright". Their answer might just be a "fantastic" in reality, because they're bored with whats been around for ages already. In contrast, when you're talking to directors from techno industries, they'll tell u "fabulous" , "fantastic" , which in reality just means "looks alright". So the point is to take into account the different industries when analysing shares.

So when the directors of company XYZ are buying, should we follow suit?