A More Powerful Tool For Small Companies Insider buying can be used for companies of all market capitalizations, but experience shows it is more useful when analyzing small companies. First, in absolute numbers there are far fewer opportunities to study insider buying with larger companies. Of over 10,000 companies actively traded, only 667 have a market capitalization of greater than five billion dollars. Moreover, insider buying seems to work more effectively with smaller market capitalization companies, for a number of other reasons. Unlike large firms, the managers have a greater understanding of the whole company and how the underlying fundamentals will impact the stock price.
Large firms are more diversified by products and geographic exposure.
At a smaller company the impact of one new product or management decision can have a greater effect on the stock price. Managers at small firms tend to have a higher percentage of their net worth invested in the stock, as there are more founders that own large percentages of the shares. This leads to more insider buying because most of their net worth is tied to the company. Also, managers at small businesses tend to be risk takers as opposed to their large company brethren, making them more prone to insider buying. The activity of insiders is reported by the SEC when Form 4's are filed on a monthly basis, anytime before the tenth of the month.