Periodically I like to scan for stocks with heavy insider buying activity. When insiders buy stock of the companies they are associated with, it sends a strong message about their belief in the future of the company. I like to look for these transactions, and to try to determine whether or not it would be a good idea to follow the insider's example and pick up a few shares of the underlying security.
The reason why traders pay such close attention to insider buying is that there is really just one primary reason why an insider would decide to purchase additional stock in the company… his or her belief that the stock is going to rise in the future. They are not required to make the purchase, they simply have a strong belief in the stock's future.
Since insiders presumably have a better understanding of the company's underlying business, their actions are definitely worth paying attention to. While they are not supposed to have access to any privileged information, there is no denying that they have their finger on the pulse of the company in a way that ordinary investors are unable to, so it is a positive sign when they decide to pull the trigger and add to their positions.
However strong the purchase may appear, we still have to do our own research into the stock and try to form our own opinion on the stock, and rather than just blindly follow the example the insider has set. This week we are going to look at a few stocks with recent insider buying and try to determine whether or not traders ought to consider setting up new positions in the stock, or adding to current holdings.