How much should you let directors’ dealings sway your decisions?

Julie Brownlee, Fsp Invest, 12 Jun. 2014

Tags: directors dealings, buy and sell shares, directors, directors share dealings, investing,

When you invest in a company, you might follow any announcements it makes. In those announcements you might see directors buying and directors selling shares. By law, directors must declare this activity to the stock exchange. So what should you read into the buying and selling of shares by directors? Should you ignore it or read into it? Let’s take a closer look…

You don’t know the reason for a director buying or selling shares

Directors may buy and sells shares in their company for a number of reasons.

Directors may be topping up on shares as they see good times ahead for the company. Equally so they could be selling shares because they see tough times ahead, or it could be simply because they need some cash to put a deposit down on a new house.

So if you want to try and read into what a director is doing with their dealing activity in a company, you need to look at it in a slightly different way.

You need to see if a director is selling a significant amount of shares

You need to find out the percentage holding the director has, David Thornton in Penny Sleuth explains. You can find this out sometimes from a company’s website or some financial sites may give this sort of information. Or it may even be in a company’s financial statements.

Then when a particular director buys or sells shares over a period of time, you can see if it makes any real difference to their ownership of the company.

If it does make a considerable difference, maybe you need to do a bit more digging.

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Committed directors are a good sign

But when you’re investing in a company, you want the directors to also have money at risk in the company. Directors like this are more likely to act in the interest of shareholders if this is the case.

What should you do? Well it’s worthwhile keeping an eye on directors’ share dealings as they can give you some hints. But equally so, don’t overreact to any directors’ dealings either. You need to at the wider picture.

So there you have it, how much you should let directors’ dealings sway your decisions.

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