Why director dealings are even more important than you think

We all know that director dealings in their own shares are one of many flags people use when researching potential investments. There is nothing better than hearing about a director investing a significant amount of money in their own company shares. On the flipside, the sale of shares by a director can also be a flag that maybe things are not as good as some people think. However, why are director dealings even more important than you think?

Few and far between

While many investor believe that directors regularly invest in their own shares, research in this particular field might surprise you. There is no doubt that many directors are active in their own shares but when you compare the number of share purchases by different individuals to the number of directors associated with listed companies, the percentage of directors who invest is minimal. This shows why director dealings should be tracked extremely closely because while the vast majority fail to buy shares even in the good times, those that do invest must have good reason.

When looking at director purchases and sales it is also imperative that you look at their overall holding and any options/free shares they may have been awarded. Share options are a very popular way of remunerating directors although the way these share option plans are structured very often it is simply a purchase and immediate sale. Where a director has no direct funds invested we can to a certain extent ignore these transactions.

Director dealings
Why director dealings are even more important than you think

Director share sales

As we mentioned above, there may be different reasons why directors sell shares such as profitable share option schemes. We often see situations where a director needs to raise funds for a tax payment, property investment or some other personal requirement. Then there is the case of founding directors simply reducing their holdings as and when market demand allows them to do so. However, when a director is selling all or a significant part of their shareholding it may well be time to sit up and listen, especially if there is no specific reason, other than from an investment point of view, for them to do so.

Let’s take a moment to look at this, if you are a director with a company then a significant sale of shares is not something you would decide upon lightly. Subconsciously there is pressure on directors to retain their shareholdings and where appropriate to increase their shareholdings in the future. So, if a director is giving a vote of no-confidence to the company they work for, it may be time to dig a little deeper and see if there are any difficulties with short-term trading or the future prospects of the company.

One of many indicators

Director dealings are just one of many factors used by investors as a flag and a potential indicator of a change in company fortunes. As we touched on above, when you bear in mind the number of directors connected with listed companies the actual number of director share dealings, bonus schemes and free shares aside, will be a lot less than many people think. Therefore, perhaps we should give more prominence to director dealings in their own company shares and the timing of such transactions.

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