Insider ownership is usually a very positive sign for investors because it means that insiders directly benefit if the company performs better. However, insider ownership can sometimes be difficult to analyze, especially when considering what a good percentage of insider ownership is. How should investors analyze insider ownership, and is it always a positive sign, or can it also be negative?
In this article, we’ll analyze what can be considered a good percentage of insider ownership and how investors can analyze it.
Is insider ownership good or bad?
Insider ownership is usually a very good sign for investors because if an insider is invested in the company, it shows that it is dedicated and committed to creating shareholder value. A company whose insiders have marginal ownership or do not even own any shares might be a signal that the company will not be managed in the best way.
If insiders are invested in the company, it also shows that they believe in the business model and the company’s competitiveness. Additionally, insiders have more information and insights into an industry and a company, so if they own shares, it is usually a very good sign for investors.
Determining a good percentage of insider ownership
To analyze insider ownership, we need to consider a few aspects because not every stock is the same, and therefore a good percentage of insider ownership for one company is not the same for another.
The first aspect to consider is the company's size or market cap. For example, a company with a $20 billion market cap, with 10% insider ownership, means that insiders own $2 billion in stock. This differs from a company with a market cap of $100 million, where 10% of insider ownership is just $10 million.
Usually, the larger the market cap of a company, the lower its percentage of insider ownership. Therefore it is important to consider whether the market cap of the company is high or not when determining a good percentage of insider ownership.
Insider's salary and net worth
Another factor that needs to be considered to put things into perspective is the salary of each insider that owns shares in the company. An insider with a high salary that owns a few shares of the company, whose value is a small percentage of his salary, might not be a very good signal. Additionally, you should also consider what the net worth of insiders is. An insider that owns 1% of a company with a $100 million market cap has $1 million invested in the stock. However, you will have to understand what the net worth of the insider is to put things into perspective. Someone with a net worth of $100 million owning $1 million in stock is a relatively small investment.
It is also essential to analyze how much of the company’s shares are bought by insiders or if they are being awarded as stock options. An insider that owns a large number of shares just because they received stock options is not as crucial as an insider that is constantly buying shares in the company.
How many insiders own shares?
Insider ownership can vary a lot from company to company, especially when it comes to the number of insiders owning shares. Consider these two examples:
A company whose founder is the only insider that owns shares, and the percentage of insider ownership is 10%. Now consider a company where the insider ownership might be lower, in the 5% range, but there are several insiders that own shares in the company. Which one is more positive?
Usually, several insiders owning shares is a sign that multiple believe confidently in the company’s ability to continue performing well and growing, while a single founder owning several shares might not indicate the same.
Are insiders buying or selling?
Finally, another aspect that has to be considered is whether or not insiders are actively buying shares. Even if the insider ownership is high, insiders are not adding shares which may signal that they are not as confident in the company anymore. Additionally, insider ownership might be high, but insiders might sell shares.
If insiders sell shares, even if the company has high insider ownership, it is usually a very bad sign, especially if no insider is buying.
Good insider ownership by the company’s market cap
Since the most important factor to determine good insider ownership is the company’s market cap, here is how you should analyze it:
For stocks with a market cap under $100 million, good insider ownership is usually above 10%.
For stocks with a market cap between $100 million and $1 billion, good insider ownership is between 5% and 10%.
For companies with a market cap between $1 billion and $10 billion, good insider ownership will be in the 3% range. For companies with a market cap above $10 billion, insider ownership will be, in most cases, marginal because to own a large percentage of the company, the insider would be a billionaire. In this type of company, you will still find high insider ownership, usually retained by the founders or founder.
Why high insider ownership is usually good
High insider ownership is usually a good sign because insiders are confident in the company and are incentivized to do their job as best as possible. They are also more likely to have their goals and objectives aligned with shareholders, and companies with high insider ownership tend to create more shareholder value over the long term. Afterall, insiders who own shares have skin in the game, which is undoubtedly positive.
Why high insider ownership can be bad
When insiders own a large percentage of the company, usually above 50%, it can be bad for investors. The main reason is that when insiders own a large percentage of a company might have complete control of the company, which may not benefit the remaining shareholders.
The board of directors might be fully controlled by one or a few large insiders that may influence all the decisions in the company. For example, an insider might be awarded stock options or delay a dividend or a share buyback program because it is inconvenient. The company might be managed to benefit the large insiders instead of benefiting all of the shareholders.
Insider ownership is a positive sign that investors should look for in a stock. However, determining what a good percentage of insider ownership is depends on several factors. Having high insider ownership tends to be positive, but it can also be negative if insiders are solely focused on doing what serves their interests instead of ordinary shareholders.