Fundamental analysis Macroeconomic indicators

The Impact of Insider Purchases on the US Stock Price

Elena Berseneva 02 june 2022 83 2

First, let's define the concept of "Insider".

 

In a general sense, an insider is a representative of a group of people who have access to some information that is not available to the public at large.

 

In the stock market, insiders include shareholders, directors, employees of a company owning more than 10% of the share capital. And the information they have about the direction of the company's development, the introduction of new products, mergers and other similar business data is considered as insider.

 

It is intuitively clear that the purchase by insiders of the stocks of their companies at their own expense indicates the expected growth in the price of these stocks.

 

In the US, the Security Exchange Commission regulates all transactions in securities, including stocks.

 

The Securities Exchange Act of 1934 requires insiders to report to the Commission the purchases and sales of stocks in their companies, regardless of the transaction value. The insider must report the purchase/sale within two days after the transaction.

 

The information about insider’s purchases/sales of stocks of their companies is open and free.


In this study, we will rely on insider’s purchases of stocks of their own companies' data from the resource: http://openinsider.com.

Hypothesis
To conclusion

Purchases of own stocks by insiders lead to an increase in their price in the short term.

К выводам
Data used

Instruments: 63 US shares

Timeframe: D1

Period: 08/01/2003 – 05/21/2021

Number of market entries: 1,076

The entry-exit strategy

We purchase stocks at the opening of the next day after the publication of information about insider purchases.

 

Closing a position

  • on the close 1, 2, 3 days after entry for short-term analysis;
  • on the close 5, 10, 15, 20 days after entry mid-term analysis.




Analysis of the obtained results 


We will evaluate the results according to the following criteria:

  • The rate of return reflects the relative change in the quotations of financial instruments in percentage. A positive value of the rate of return indicates the profitability of the strategy, negative - about the unprofitability.

 


The rate of return (R) of a financial instrument is calculated using the formula:

 

R = Σ P (%) / n,

 

where: n is the number of transactions;

 

P (%) – the percentage of change in the quotation of the financial instrument at the time of fixing the position, is calculated as follows:

 

for buy positions

P (%) = (position closing price - position opening price) / position opening price * 100%

 

for sell positions

P (%) = (position opening price - position closing price) / position opening price * 100%

 


We will also calculate the rate of return depending on the amount of investment by insiders in their companies and trace the dynamics of changes in the profitability of the strategy over 19 years.

 


Dynamics of changes in rate of return by years:

Charts of stock profitability, especially in the medium term, allow you to notice 5 “failures” of the US stock market over the past 19 years.

 

Here they are:

  • October 2008: US stock market crash following the 2007 US mortgage crisis and the bankruptcy of one of the largest US banks, Lehman Brothers.
  • August 2011: US debt redistribution crisis. On August 5, 2011, Standard & Poor's downgraded the long-term credit rating of the US government from AAA to AA+.
  • August 2015. The main reasons for the fall of the US stock market were the slowdown in the economy of China, at that time the leading trading partner of the United States, and the devaluation of the yuan.
  • "black" October 2018. The American economist D. Richards has noted that the rapid rise of the US economy at that time could have resulted in a grandiose stock market crash, similar to the crash of 1929. These fears have been considered by analysts as one of the reasons for the October collapse.
  • February-March 2020: market decline due to the COVID-19 pandemic.

 

It should be noted that during periods of the US stock market “failures”, having bought stocks after insiders’ infusions into their companies, it is worth to hold them for a short period: two, sometimes three or five days was more profitable.

 


For further analysis and a more representative determining the average profitability of the strategy over the 19-year period under consideration, we will filter out periods of “failure” of the US stock market as anomalous cases.

 

After filtering, the number of stocks was 61, and the number of market entries was 984.

 

So, let's determine the average profitability of the strategy, as well as the profitability depending on the amount of investment by insiders in their companies.

 


The short-term

The rate of return of the strategy, regardless of the amount of investment by insiders in their companies, is close or higher than a significant value of 0.3% when fixing a position at the close of the second and third days.

 

With investments of insiders from $1 million, exiting the market at the end of the second day becomes more profitable.

 


The growth and rate of return of 0.3% and more in the short term with the described strategy for the entire period (19 years, excluding “failures”) have shown by 6 US stocks:

 


The medium-term analysis

The strategy of buying stocks the day after the publication of data on insider buying justifies itself with any amount of investment by insiders in their companies.

 

The rate of return of the strategy, regardless of the amount of investment by insiders in their companies, is higher than a significant value of 0.3%.

 

The more own funds insiders invest in their companies, the higher the stock price of these companies in the medium term.

 

An exit from the market at the close of the third week is the most profitable.

 


The growth and rate of return of 0.3% and more in the medium term with the described strategy for the entire period (19 years, excluding “failures”) have shown by 9 US stocks:


 

The growth in both the short and medium term with the described strategy for the entire period (19 years, excluding “failures”) have shown by 6 US stocks:

Conclusion

Purchases by insiders of stocks of their companies lead to an increase in their price both in the short and medium term. The growth in the medium term is higher than in the short term.


In crisis periods, according to the strategy, it is more profitable to hold positions for a short period: two, sometimes three or five days.



The benefits of the strategy of buying stocks after the insider purchases have been revealed.

Detailed results are shown in the Appendix:

XLSX (0.32 MB)Insider purchases.xlsx

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