Insider Trading Data of BSE and NSE can be extremely valuable for the stock market investor. Insiders like company promoters and people from the top management are generally more privy to the company's future prospects. Hence, insider trading activity offers clues about how a company will perform in the short and relatively longer time frame. For instance, heavy and clustered buying from company insiders may indicate that promoters are confident about the business prospects and they feel that the stock is undervalued. Such insider activity more often than not leads to changes in stock prices offering profitable investment opportunities. With our Insider Trading Activity Dashboard, we offer a quick way to find and use insider trading information to make well-informed investment decisions. With our tool, you can easily track which company insiders are buying and selling their stocks on a regular frequency. This data can then be analysed and interpreted for better insights to make some profitable investment decisions. The data can be independently verified on Nse India and Bse India websites.
What is Insider Trading?
Insider trading refers to the buying and selling of company securities by corporate insiders such as promoters, CEO, managers or executives. Insider trading can be both, legal or illegal. If there is no attempt by company insider to benefit from trades based on information about the company which is yet not in the public domain, then the trading is perfectly legal. For example, if a promoter of Company ABC purchases shares of the company based on a pending merger announcement, he is a culprit of illegal insider trading. However, if he buys shares after the company has announced the merger publicly, he is not engaging in illegal insider trading.
So, legal insider trading is when corporate insiders like promoters, CEO, directors, and employees follow the stipulated guidelines and involve in buying and selling of stocks of their own company.
Implication of Insider Trading on Investment Returns
Usually, an increase in promoter's stake shows their confidence in the company. Promoters increasing stakes in their own company is seen as a positive signal by the market and investors too. It indicates that the promoters are confident about the business prospects and expect the company to do better than the peers in the coming future. Historically, it has been observed that investors have gained by investing in companies where promoters have increased stake. However, this is not true in all the cases. Weak market and poor fundamentals of the company can make a stock fall even if the promoters are buying its shares. So in the long run you cannot beat the fundamentals.
How to interpret Insider buying and Insider selling?
An increase in the stake (buying) by promoters is seen as positive for the stock if it happens at prevailing market price or at a higher price. For example, if buying is through open market purchase or preferential allotment or conversion into equity shares at a price which is higher than the current market price. But investors should be sceptical if promoters stake rises on the basis of valuations as a result of some merger or acquisition that are not reasonable. Companies with significant insider buying, especially near 52 week highs have been observed to outperform the benchmark, thus reinforcing the view that insider buying data has significant actionable insight. However, the same cannot be said about insider selling unless there is a clear pattern which can be spotted with certainty. Often promoters tend to liquidate their stock holding to raise capital for business expansion or personal use. Such actions don’t mean that the promoters are in a mood to abandon the ship and should not be perceived as negative. So an investment decision based on promoter’s selling data needs a deeper and more careful analysis.
How to best use Insider Trading Data of NSE and BSE?
Any change in promoter holding is important from the investor's point of view as it helps in gauging the insider sentiment and hence the future stock price movement. As a thumb rule:
Investors should look for clusters of activity by several insiders. If more insiders are trading similarly over a short period, there's a sign of a consensus of insider opinion.
Watch where the transactions are happening. Are promoters liquidating near 52 week low (red flag) or are they buying near 52 week high (bullish).
Large transactions (either buy or sell) carry more weight than small trades.
Do not follow insider activity blindly. Continue, as you normally would, to complete your due diligence on a company (fundamental and technical checks), before moving ahead with the investment decision. Although, insiders probably know more than the rest of us, their trading activity should not be the only basis for investment decisions. Factors such as fundamentals and valuations are other key factors which should be kept in mind.
Word of Caution
Insider Trading Data of NSE / BSE and promoter’s actions are important data inputs, but they should not be the only factors driving investment decisions. One cannot replace the highly dependable tenets of fundamental analysis and due diligence with short term data adventures. Insider trading activity on its own is not necessarily a buy or sell signal, but it certainly offers a handy first screen for investors who are looking for good investment opportunities. So it’s better to use insider trading data for confirmation rather than action, which should be based on fundamental and technical checks.