Insider Stock Buy-Sell Ratio

Definition

The term insider stock buy-sell ratio refers to a calculation that allows the investor-analyst to understand if employees expect the company to over-perform or under-perform in the near term. The insider buy-sell ratio is indicative of employees being aware of information that has not been fully disclosed to the public.

Calculation

Insider Stock Buy-sell Ratio = Sell Transactions by Insiders / Buy Transactions by Insiders

Where:

  • The values of buy and sell transactions can be orders (buy orders, sell orders) or numbers of shares bought and sold (share volume).

Explanation

Market performance measures allow the investor-analyst to understand the company's ability to achieve their high level business profitability objectives. This is usually assessed by examining metrics such as insider transactions, capture ratios, enterprise value, capitalization rates and price to earnings ratios. Market performance metrics provide analysts with a way to determine if a company is going to successfully execute their business plan. One of the ways to understand the way insiders feel about their organization is by calculating its insider stock buy-sell ratio.

Company executives will have insights into the challenges of their organizations, specifically whether or not the company is able to meet market performance expectations. An investor-analyst can gain insights into this internal sentiment by examining the company's insider stock buy-sell ratio. Typically, when insiders are optimistic about their company's prospects they will purchase shares of stock since they believe the current price under-values their organization. The opposite is true if they believe the market is paying too high of a premium for a share of common stock - they will tend to sell shares. The insider stock buy-sell ratio takes the volume of sell orders and divides it by the volume of buy orders. If the ratio is less than one, then insiders are purchasing more shares than selling, which is a positive sign for the investor-analyst.

Example

A mutual fund manager was interested in determining how confident leadership at Company ABC were the company could achieve a very aggressive business plan recently shared with Wall Street analysts. The manager asked his team of analysts to determine Company ABC's insider stock buy-sell ratio.

The team reviewed insider transactions over the last two months and determined there were a total of 15 sell transactions and only seven transactions involving the purchase of common stock. Closer examination of the data revealed the seven purchase transactions involved 15,200 shares while only 6,300 were sold. Calculating the company's insider stock buy sell ratio:

= 6,300 / 15,200, or 41.4%

Given the above information, the mutual fund manager asked his team to provide some additional insights into the buy and sell orders. Specifically, the sentiment among employees such as the CEO and CFO versus the remaining pool of insiders.

Related Terms

enterprise value to earnings ratio, market value added, institutional capture rate, dividend yield ratio