How to Trade on Insider Information

The law identifies an “insider” to be a person that has a special relationship with a publicly traded company. This relationship is based on the person’s position, share ownership, or information they might possess about the company that other people do not know.

However, insiders are legally allowed to trade their company’s stock. It must take place during certain periods and once a trade is made, the insider must disclose through a public directory details of the transaction.

These filings are closely followed.

New reports that insiders had “dumped their stock” at Amazon, Meta Platforms (formerly Facebook), and Nvidia have attracted attention. Over the last month, Jeff Bezos reduced his position in Amazon by $240 million; Mark Zuckerberg sold $193.6 million in Meta Platforms; and Jensen Huang cut his ownership in Nvidia by $56 million. A closer look at these transactions, however, shows another side to the story. Bezos and Huang gifted their stock to charity. While Zuckerberg made outright sales, it was part of a trading plan adopted last summer. Put these numbers into perspective. Even after the dispositions, Bezos will still own almost $150 billion in stock; Zuckerberg well over $100 billion; and Huang almost $50 billion.

The point being made is that there are many reasons to sell a stock — taxes, estate planning, or philanthropy – that go beyond a lack of optimism for a company’s future. For that reason, we don’t pay very close attention to insider sales.

However, there’s only one reason to buy a stock.

We certainly pay closer attention to insider purchases.

On February 11, 2016, JPMorgan’s stock price had plummeted almost 20% since the year began. Its Chair and CEO, Jamie Dimon, purchased shares on the open market. Dimon bought about $25 million, equivalent to about a year’s compensation. The purchase marked the very bottom of the stock for that year, which subsequently rallied and finished 2016 up nearly 65% from the price Dimon paid 10 months earlier.

In fact, Dimon’s purchase was enough of a catalyst to also turn the market around too. The S&P 500 was down 11% year-to-date on February 11, 2016, and then finished the year up 10%. February 11 turned out the be the bottom of the market.

Dimon announced on October 27 he plans to sell one million shares of JPMorgan beginning next year. Nevertheless, JPMorgan’s stock has rallied over 15% since then.

Our investment team regularly monitors insider purchases for existing client holdings as well as stocks we monitor but do not own. Insider purchases enhance our confidence in existing position and provide a catalyst to purchase a new stock for client accounts.