Insider sales are a widely discussed topic, but most of the time, these sales shouldn’t weigh on your investment thesis. Here’s why.
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First, there are two types of insider transactions: pre-arranged and spontaneous. Pre-arranged sales are carried out under a 10b5-1 trading plan, a tool that insiders can use to schedule their sales in order to avoid accusations of illegal insider trading. Spontaneous sales are carried out without using a 10b5-1 plan — investors should place more emphasis on these sales. Whether a sale is pre-arranged or spontaneous will be listed in the footnotes of the sales filing.
Insiders could also sell shares in order to fulfill tax obligations for receiving stock awards and options. These sales provide very little actionable insight.
Ignore the Dollar Value of Sales and Focus on the Percentage Sold
The amount that the insider sells is also extremely important. Not the dollar value, but the percentage of the sale relative to the insider’s prior position.
For example, Amazon (AMZN) Executive Chair Jeff Bezos made headlines after selling a staggering $736.68 million worth of AMZN stock on June 27 and 30 using a 10b5-1 plan. While the dollar value is high, the sale was only 0.37% of his prior stake. A sale that small, on a percentage basis, doesn’t represent a loss of confidence. It represents the Amazon founder taking well-deserved gains on a spectacular investment, possibly to fund his recent wedding with Lauren Sánchez.
Check out TipRanks’ Daily Insider Trading Tracker for the latest insider transactions.
