Tracking insider buying is one of the most powerful strategies I use in The War Room.

It’s important to remember that insider buying is legal and every insider is required by law to report their trades to the Securities and Exchange Commission.

This is different from insider trading, which is illegal and involves trading a stock based on non-public information about the company.

One of the main reasons I like insider buying is because insiders only buy shares of a company for one reason – they think its stock is going to go up.

So today I’m going to show you my formula for discovering a lucrative trade opportunity based on insider buying.

Criteria No. 1 – Buying in Size

Buying in size means insiders are buying thousands upon thousands of shares on the open market with real money.

This real money has to be in the tens of thousands, if not hundreds of thousands, of dollars.

They can’t be any insider, either. They have to be a high-ranking executive at the company, not a director. They’ve got to earn their money.

Criteria No. 2 – Multiple insiders are buying

The next thing I look for is at least two more executives buying shares on the open market, chronologically – again with size and at market prices, and preferably at higher prices.

In other words, I look for a cluster of insiders, all buying.

Then I want to see some director buys.

All in all, I want to see at least five insiders buy shares in size before I look at the company.

If there are only three or four insiders buying,

I want a lot of size and executive participation.

Sometimes the underlying company is not doing well and is a turnaround candidate. This is the most dangerous type of insider buy, and I will note that the buy is very speculative. In this case, the returns can be phenomenal, but so can the risk. It’s speculative, which means you don’t buy very much!

Certain sectors for insider buying

Sometimes I’ll look at companies in the healthcare or biotech sectors using this formula. When insiders buy here, it’s usually because they have good information from clinical trials long before the FDA or the public knows about the trial data.

While not as speculative, these types of insider trades do hinge on the final outcome of a trial; hence, they do carry more-than-average risk.

There might be situations where there are massive buys by insiders that are far bigger than the norm – buys that are in the millions of dollars, for example. But those buys are by shareholders who already own a large chunk of stock. This type of buying, while attractive, also makes me wary. These are long-term investors – value investors – who can wait years.

I am not interested in waiting years. Most insider trades that meet the tests I described above come to fruition in a year or less. Those are the ones I want to focus on. And those are the cluster buys that typically lead to tremendous gains.

YOUR ACTION PLAN

I post these cluster buys – as they happen – all the time inside The War Room.

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