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Why Director Dealings play an important role in stock-picking

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Regular readers of The Armchair Trader will know that we review Director Dealings every week and pick out those we feel are the most significant. 

Directors are obliged by law to publicly disclose any transaction they make in a company they work for.  The law applies whether the transaction is conducted directly by the director, or indirectly via an investment vehicle of which the director owns a significant proportion.  It’s essentially a permitted form of insider trading with strict rules around timings and disclosure.  So the motives can be a little more nuanced than simply buying and selling to reflect confidence in the share price.

Why are Director Dealings important?

A director buying shares in their own company can be a sign of confidence that the share price is likely to go higher, particularly if the sums involved are considerable. After all, who would invest large sums of money in a business they didn’t believe in? However, it’s not always that simple. Directors can use these disclosures and the publicity surrounding them to give the impression of confidence, in turn generating interest in their company. But in general a director will not purchase shares prior to any significant newsflow from the company because the  resulting punishment (for what is effectively insider trading) acts as a significant deterrent.

Conversely, a director selling shares in their business is rarely seen as a vote of no confidence. After all, it doesn’t look great for a director to sell shares if they feel the share price has risen as high as it will go. Rather, selling shares is often a form of remuneration or bonus for a director who has achieved their targets.  They may have bought shares at a previously agreed discounted rate and are now selling them at the current market rate in order to realise that bonus. Investors should look closely for the reasons associated with any sale before jumping to conclusions.

How to use Director Dealings

Director dealings can provide a useful barometer for how a company’s fortunes are perceived internally. While they should not be the single criterion used to make an investment decision in a stock they can prove to be a useful measure to back up your research, or provide you with useful ideas to investigate further.

Check back every week for our director dealings updates. Our guide to investing for beginners is a great resource to help you get started and if you are a UK resident, you’ll find our Stocks and Shares ISA guide useful too.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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