Don Steinmann's Investment Tip of the Week

Don Steinmann's
Investment Tip of the Week

Insider Ownership

If you’re researching a stock, one of the things you want to know is, how much stock is controlled by insiders. You can find this information by looking at the latest 14-A (proxy statement) at http://www.sec.gov. Why is this important? Two reasons.

First, if insiders control 50% of the company, it means that a takeover of the company is not possible without their cooperation. That isn’t necessarily terrible, but it does remove one source of a possible big bump in the stock price, if insiders don’t want to sell.

Second, if insiders control almost no stock, they have no “skin in the game”. In this case management is basically working for a paycheck. That means they may want to keep things status quo, so their paycheck keeps coming.

In an ideal universe you’d like to see management or other insiders (i.e. company founder and family) control 10 to 25% of the company. Enough that they have a big stake in what happens, not so much that they can block a generous takeover.

That isn’t to say that a big or small insider position should keep you from buying a stock. But you need to be aware going in that this can be a positive or negative based upon how much stock insiders control.

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