Buying and selling of stocks by majority shareholders is often tracked by investors. While buying shares is considered to be good sign, selling of shares is often negatively viewed. And there is a good reason for the interest in promoter's actions. After all, no one knows the company as well as the promoter. If the latter increases stake in the company, it generally gives signals to the market that the promoter feels that the stock is undervalued.
As suggested in an article in Business Today, in case of 147 companies in S&P BSE Index, promoters have increased stake in FY14. Further, 140 of these companies have seen an increase in stock price since April this year. In some cases, the returns have been higher than 100%. However, the inverse is not true. The same article suggests that nine stocks in BSE 500 index have witnessed a reduction in promoters' stake in the year 2014. And even these stocks have offered more than 100% returns since April.
So should investors base their decisions on promoters buying?
While investors should track promoters' activities, they should not blindly follow the latter. Buying decision in a stock should be based purely on fundamentals and valuations.
This applies also to the cases where promoters sell the shares.
While promoter stake sale warrants caution, if it is in response to government's regulation to bring public shareholding to a minimal threshold, it should not bother shareholders as long as fundamentals remain strong. That said, a heavy stake sale by promoter should worry investors. Especially in cases where management is not very professional.
Infact, any activity by the promoters that does not seem in line with interests of minority shareholders should ring alarm bells for investors.