In the UK (and most other countries) directors of a listed company are required to disclose their trades in the company's shares (and its other securities).
Dealing by directors and other people who know a company well is sometimes confusingly described as insider dealing. To avoid confusion with insider trading it is preferable to use the term directors' dealing.
Directors are obviously in an excellent position to assess the value of a company, however the value of their investment decisions as an indicator is reduced because:
- Directors may choose to sell for a variety of reasons; to raise money for personal reasons or to diversify their portfolio.
- Directors may buy as a deliberate gesture of confidence, or hold back from selling so as not to damage investor's confidence.
- If they have specific price sensitive information, insider trading law forbids them from trading until the information is disclosed to the market.
For these reasons, when looking at directors' dealings, it is important to look not just at the most recent directors' dealings, but at the overall pattern and the amounts involved. The more directors have bought or sold, and the larger the deals, the more likely it is that the dealing means something from an investor's point of view. While directors are likely to buy small amounts as a gesture, they are less likely to invest significant amounts of their personal wealth just to make shareholders a little more confident. A consistent pattern of buying or selling by several directors is the most likely indicator from which something can be usefully inferred.
Directors' dealings should not be the only reason for making an investment decision, however they may be useful in conjunction with other information.