Company directors can give excellent insights into the performance of their companies. Better still they can reveal excellent signals of when to go buy or sell their companies shares. Directors do, but not always, buy their companies shares when they expect them to do well and sell when they don’t expect them to do as well. However, the actions of these elite businessmen need to be taken with caution. Often directors decide to buy to help improve sentiment for the shares or they may sell just because they need to raise funds for a tax bill or an expensive divorce. Director deals are reported to the listing authorities and regulators daily.
This post looks at director dealing as a serious tool in the investing / trading toolkit, how using director deals can fit with a trading strategy, how the information should be used and where to find information about director deals.
An art rather than a science.
With many director deals being reported daily it is wise to apply a filter to gather whether these deals are significant. Using director deals as a signal to trade is most definitely an art rather than a science and should be used in conjunction with a wider technical and fundamental analysis.
How can deals fit in as part of a trading strategy?
Some use director deals as a filter for which shares to trade. They do not use director deals in isolation but rather an indication about which companies are prospective trades. Once you have identified an opportunity take a look at the company charts and fundamentals to see if it is worth entering a trade. If a director deal coincides with a spike in trading volume there could be something brewing behind the scenes. This could be good as part of a spread betting trading strategy.
Directors aren’t stupid…..if you had price sensitive information an knew that your companies share price will increase….it would be unlikely you’d not want to benefit from this. It must be borne in mind that they may not be able to deal at the optimum moment due to the relevant stock market regulations. A director must not buy or sell shares a certain amount time before the company results are released.
How to filter this information?
To spot whether a directors deal will foretell the direction of the companies share prices we should take the following into account….
* How much have they spent?
o If you are using a RNS news service ignore ‘Director/PDMR Shareholding’ notifications. These relate to share options being taken up.
o You need to make a judgment on the directors intentions. A new director or one that is about to leave may have to sell shares. For a mid sized company you might expect a purchase of more than $200000 or £100000 to be significant.
* Consider the director deal in relation to…
o Their overall holding. If they have a huge holding and they buy the equivalent of a twentieth of it then this may not be significant. If the size of the deal is large compared to their existing holding then take more notice.
* How large is the company. If a director of a smaller company is spending large amounts of money this could be an opportunity. Their interest is likely to be greater because the financial implications if the share price moves against them would be greater.
* Have other directors bought shares? If each director is investing a relatively large amount this could be a signal. Has the finance director purchased? He’s in the best position to know about the risk / reward the share offer.
* Look at a share price chart of the company. Apply your chosen investment / trading strategy…..and use the director deal as an indicator as to whether you should enter a trade. Look for a spike in trading volume indicating that institutional investors are buying or selling large volumes.
Find director deals?
Director deals can be found on regulatory news announcements from stock exchanges. However, it can be time consuming to find the announcements about director deals that interest you. Spread betting companies may provide this information on websites like sharecast.com, who provide a summary of who has bought and sold – it is easy to see how much they’ve spent.