Here is an interesting little tidbit that some may not be aware of and should be, as it is part of a subject that gets a lot of peoples backs up.

The topic is insider selling. Why are we seeing insider sells right now?

This is something you may see in many small juniors right now.

Many say, “Oh, look the insiders are selling, there must be something wrong”. But that is not necessarily the case.

Here is an interesting piece of information.

Most directors in small junior exploration companies get a fairly small salary if any and are therefore compensated by the issuance of options and warrants in a stock option plan usually laid out and agreed upon by investors at an annual general meeting.

So at certain times of the year, they will exercise these option and warrants and sell some of them in order to generate an income to survive on.

But what happens when options etc are exercised.

Well let’s say hypothetically that Director Jon Doe in 2010 exercised 300,000 options in October. Let’s say they were $0.15 options and the share price was $2.25 on the date they were exercised

What we have to realize is that once these options are triggered or exercised, bought whatever you want to call it, many seem to think that there are no taxes triggered until they are sold. Therefore except to purchase them there is no cost involved. Therefore if I don’t sell them for three years it costs me nothing, but that is not the case.

Once they are exercised or bought, the difference between the option price and the current market value is calculated. In this case the difference would be $630,000.

This $630,000 would then be added to your total income for the year 2010, and you would pay capital gains tax on 50% of the $630,000 income based on whatever the tax rates are for the province you live in. (50% capital gains tax on $630,000 is the same as paying whatever your regular tax bracket percentage would be in your province on $315,000 or half)

This being said, many directors at the end of the year, are struck with some pretty hefty tax bills come the end of April. Some may owe tax bills in excess of many tens of thousands of dollars. Money which in many cases they don’t just have lying around in their bank accounts. Therefore you will find at this time of year, with many small junior exploration companies that there is some insider selling. Not because there is anything wrong, but because some may have to sell some shares in order to help pay some large tax bills at the end of April.

Another point I think that needs to be made here is that contrary to some peoples opinion that insider selling is always a sign of bad news, I think myself that it can in many instances be a sign of a company that is prospering and in good health. This type of thing is generally seen in companies that have had a prosperous year and made big gains in shareholder value and share price.

For example, if a company was failing or stagnant, why would the directors want to exercise options and warrants at $0.15 if the current share price was $0.12 or basically remained the same? They would be better off to let them expire and claim a loss.

Food For Thought

Hogtown