Suppose that on January 1st 2000 the share price of Bluebell Coathangers is £1.00. A new Finance Director is asked to join the company and, as part of his incentive package, he is granted options which allow him to buy 10,000 of the company's shares at £1 each in three years time.
As intended, the Finance Director is highly motivated by these options and the company does so well over the next three years that its share price rises to £3.00. The Finance Director exercises his options and pays £10,000 for shares that have a market value of £30,000.
A week later you spot the Finance Director selling 2,000 shares - 20% of his personal holding - at £3.00 each.
What conclusions should you draw?
Well, apart from going through the normal checks already discussed in this tutorial, it is worth remembering the particular circumstances of the Finance Director's acquisition of the shares. He has been waiting for three years to cash in on the options, and the fact that he crystallises a profit on 20% of his holding does not necessarily show a lack of faith in the company.
With regards to directors buying shares, if the director in question has only been with the company for a few months, then this can be regarded as relatively unimportant as they may be required to build up a certain holding on joining the company.
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