What is Insider Ownership

Insiders are key officers, members of the board, and others holding at least 10 percent of the outstanding shares.

Insider ownership is usually expressed as the percentage of the firm’s outstanding shares held by insiders. Institutions holding 10 percent of a company’s shares are considered insiders, so the total of insider plus institutional holdings can exceed 100 percent of outstanding shares.

Float

Insider holdings are not considered as available for daily trading, because insiders are restricted as to when and how often they can trade their shares. Float is defined as the shares not held by insiders and thus available for daily trading.

Insider Holdings

Multex Investor’s Snapshot report lists the number of shares outstanding and the float. You can compute the number of shares held by insiders by subtracting the float from the shares outstanding:

insider owned shares = shares outstanding – float

Once you have the number of insider owned shares, the insider ownership percentage is the number of insider owned shares divided by the number of shares outstanding:

insider ownership percentage = insider owned shares / shares outstanding

AVOID VERY HIGH OWNERSHIP

In the past, market gurus advised avoiding stocks with low insider ownership, reasoning that company executives holding big stakes in their firm have a stronger interest in seeing the share price increase than those without big holdings. That makes sense, but these days many corporations couple their executive’s pay to stock performance. Further, many grant key executives huge stock options that give them plenty of incentive to hype their stock prices. These realities of modern day corporate life make insider ownership irrelevant in terms of executive’s motivation to keep the share price up.

In fact, high insider ownership (e.g., 55 percent or more) signals risk because the insiders may be large investors who are waiting for the opportune time to sell their holdings. It’s no fun owning a stock when large shareholders dump a few million shares onto the market. These situations most often occur when a company was spun off from a larger corporation or was recently taken public following an earlier leveraged buyout.

In other instances, high insider ownership may reflect holdings owned by the founding family or by descendants of the founder. Such family owners may not see an advantage to higher share prices. Avoid companies with 55 percent or more insider ownership without further researching these issues.

INSIDER TRADING

Insider buying or selling can be a tip-off to key executives expectations for their company’s stock price. But interpreting the information requires some care. Insiders often exercise stock options and then sell their shares on the same day. Such transactions are normal and do not necessarily reflect a negative opinion about the stock. Pay most attention to transactions by the chief executive officer, or the chief financial officer. The only significant transactions are large open market purchases or sales that are unrelated to option exercises. The significance of a trade depends on the trade size compared to the insider’s total holdings. It’s not significant if an insider sells 20,000 shares, but still holds 2 million shares. It is significant, however, if the insider sells 1.5 million of the 2 million shares owned.

Often, an insider trade may not be as significant as it appears. Some companies loan money to executives to finance purchasing the company’s shares. In these instances, their buying reflects the deal they’re getting, rather than their view of the stock’s appreciation prospects. Also, key insiders, especially the CEO, often have rights to shares that do not appear on their listed holdings. It may appear that they are selling all their holdings, but they actually control, or have rights to, millions of additional shares.

Insiders are supposed to report their trades by the 10th of the following month. So trades made on September 20, for instance should be reported by October 10. However, trades made on October 9, need not be reported until November 10. Late reporting is common, and I’m not aware of an insider ever going to jail for late reporting of their trades. The financial news media as well as investors, both professional and amateur, monitor insider trading reports filed with the SEC. So it should come as no surprise that insiders are getting more creative about how they do their trades. It recently came to light that some insiders have sold shares back to their company, rather than selling on the open market. By doing so, they avoided having to report their sales in a timely manner.

Summary

Despite the timeliness issue, growth investors should be cautious about investing in stocks with less than 30 percent institutional ownership because it’s likely that these savvy investors are avoiding the stock for good reason.

Avoid stocks with very high insider ownership, as that signals that big shareholders may be waiting for the opportune time to reduce their holders, among other potential problems.

The close attention given to insider trading reports in recent years has made that data less significant as insiders learned how to game the insider trading reports.