How to read the financial pages

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14. Directors dealings

Directors dealings are purchases and sales made by directors of shares in their own companies. They are reported in the weekday and Sunday newspapers, on websites, and in tables at the back of the weekly investor magazines.

The theory behind DD investing is that:

1. Directors of a company know better than anyone else how well it is doing
2. If they buy shares, it is because they think the company is undervalued
3. If they sell shares, it is because they think the company is overvalued
4. In time, the market will realise that it has misvalued the shares, and the price will go up / come down exactly as predicted by the directors
5. Outside investors who copy directors will profit alongside them

That is the theory. Unfortunately, the assumptions in 1, 2, 3, and 4 don't always hold true. And even if they do, there are all sorts of refinements to the simple rules above.

That's where close inspection of directors dealings tables can come in handy. All the broadsheet newspapers and investors magazines provide information on directors dealings, so you won't have any trouble sourcing the data.

• Look for large purchases
  Large purchases are more significant than small ones. Check how big the purchase is in relation to the director's existing holdings.

• Look for purchases by main directors
  Dealings by Chief Executives are the most significant as they are in the best position to judge the company's prospects. Finance Directors are also important as they control the purse strings. Dealings by Non-executive Directors are not usually seen as so significant.

• Look for cluster dealing
  If several directors buy shares or sell shares at the same time, it is a more powerful signal than if one buys or sells alone.

• Check to see what happened to the share price last time a director of the company bought shares

Be careful, though, not to place too much store by directors dealings. If you use them at all, do so to corroborate a view you already hold about a company, rather than as the main driver of a stockpicking strategy.

1. What are the financial pages? 2. What to look for 3. Business news 4. Share prices in newspapers 5. Investment trust prices 6. Share prices on the internet and television 7. Commentary on share price movements 8. Anticipating company results 9. Finding company results 10. Interpreting company results 11. Takeovers and mergers 12. Indices 13. Sectors 14. Directors dealings 15. Unit trust information 16. Government bonds 17. Corporate bonds 18. Economic data - who needs it? 19. Key economic indicators 20. Conclusion

• How to Read the Financial Pages
• Eat The Rich