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Singapore

Insiders Are Selling, Should You?

The_Insider

One of the more commonly used strategies by investors is to follow the insider. Some might even assume that since insiders are “in the know”, they will be able to predict or control the price of the company.

And, there might yet be others who would turn the argument on its head and say that if insiders are selling, then bad news is likely to be around the corner.

Thing is, there’s just no basis for assuming that bad things would happen just because an insider’s selling shares.

Eu Yan Sang (SGX: E02), Courage Marine (SGX:E91) and Jaya Holdings (SGX: J10) are just some of the companies in Singapore’s stock market that have seen some insider sales this month. But that doesn’t necessarily mean they’re in bad shape though.

Today, we’ll  look at some genuine reasons that insiders might have for selling their company’s shares and break the myth that insider selling is automatically bad news for other shareholders.

Who is an insider?

But first, let’s define who an “insider” is. By definition, an insider is either a director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company’s voting shares.

With that out of the way, let’s look at four legitimate reasons that might cause insiders to sell their shares.

1. Diversification

For some senior officers or major shareholders, the shares they have in the company may constitute the main portion of their wealth. In such cases, it is reasonable for them to sell a part of their stake to diversify their investments.

2. Cashing their options

Some companies will compensate their employees through share options. When these options can be exercised, some employees may prefer to cash them out as such options can be viewed almost like an employee’s salary, so-to-speak

3. Clear off debt

Insiders, like every other individual, will sometimes face problems with their personal finances. In times like that, they may need to sell shares  of their company to payoff mortgages or other individual debts.

4. Personal consumption

An insider can even sell some shares to buy a new house, a new yacht, a new car, or a new-anything.

We sometimes tend to forget, but insiders’ shares in the company are part of their personal wealth and they have every right to enjoy it too.

Foolish Bottom Line

All told, there can be many reasons  as to why an insider will need to sell his or her shares and often, those reasons  are perfectly legitimate. As an investor, it is best not to read too much into it the next time you spot an insider selling

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.

See all posts by Stanley Lim, CFA
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