Instances of directors buying their own company shares can send a strong signal to the market that may herald a significant jump in the price. Strict rules apply to these types of transactions to prevent insiders from taking unfair advantage of their position, but the fact remains a member of the board will always know more about the state of the business than anyone else.
Purchases are generally more transparent than sales as the latter could be completely unrelated to the company’s prospects – sales could be for different reasons such as personal tax reasons [exception is when the board is selling en masse which signifies an excellent opportunity to go short]
Directors are not allowed to deal where they may be in possession of unpublished price-sensitive information and were they to do so they could fall foul of the insider dealing regulations. Trading is also specifically prohibited during the close period, which covers the weeks leading up to the publication of the annual or half-yearly results. To be more precise, the closed period actually goes from the end of the financial reporting period to the date the accounts are published unless this is longer than two months, whereupon it is restricted to the immediate two months prior to the release of the figures.
The London Stock Exchange stipulates directors of Britain’s quoted companies must disclose any interests in the shares and notify all changes within 5 business days. The company then has until the end of the following day to alert the LSE, whereupon the announcement is made public via the RNS. Most spread betting trading platforms include this sort of news feed as standard so the challenge is to identify the important transactions from the mere routine.
What to Look For
The regulations sometimes have the effect of preventing the directors from dealing at the optimum time. Because of this, large deals that take place either just before or just after the closed period can be particularly significant. The reasoning is these represent the first and last opportunities to trade around the results announcement and give a pointer to the current conditions. One of the most bullish signals is if the price rallies following the release of good figures and the directors then pile in and buy.
Look whether a lot of directors are acting in sync and whether the trades are significant relative to their salary and the size of their existing holdings. – this shows the level of commitment behind the trade