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The media might love trying to hype up the current market volatility and turning it into a bear market, but the insiders keep buying their own shares. Although there might be any number of reasons for a director to sell shares in the company he manages there are only a few reasons to buy those same shares on the open market: - Being a director often comes with owning a certain % of the share capital due to contract clauses and incentives etc. This might be in the contract and/or might help add influence and security to the director’s position.
- The director might want to prop up a declining share price by giving his “capitalist” vote for it. I.e. investing in it. Nothing makes a CEO look worse to his peers and his shareholders than a sliding share price.
- The share might actually be a very good investment.
This list is not exhaustive, but does cover the most common reasons. Both the first and second points I will not go into and, especially the second one, us outsiders might never learn of. Of the third one…this is the one to look out for! Indications of the third reason for insider buying are when a significant amount of the shares are bought and that the shares keep being bought. Also—and this could become a very controversial topic—look for purchases of the real equity (as this bodes well for the long-term) and not “gambles” in futures. (The latter might well cause quite a few gray hairs after the market’s recent dip when the brokers call all those directors up for their margin calls…) Now getting back to the media-hype of whether this is a bear market or not… Well, I’m not speaking globally (i.e. about the US), but if you look at the JSE in just the last couple of days a total of around R151 million was traded by insiders. Of this only 30% related to insiders selling (of this 30% that sold Mr Melnik from Peregrine Holdings sale of R35 million of PGR share accounted for 78% of all insider sales). Thus a total of around R106 million or 70% of all insiders bought into their own company’s falling share prices! A fact like this cannot be ignored when reviewing our local bourse’s future and, I believe, speaks volumes more than any amount of media hype. Small cap companies where insiders bought significant amounts in are Blue Financial Services, Sekunjalo, and AfDawn.
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