Why Insider Buying Often Beats Selling as a Market Signal

Investing based on insider activity can provide valuable signals, but not all moves carry the same weight. Experts often argue that insider buying is a stronger indicator than selling, as it typically reflects genuine confidence in a company’s prospects. Michael Brush, Chief Analyst at Cabot Insider Edge, has outlined key rules for interpreting these signals effectively. Brush’s first rule is to ignore insider selling. Executives and directors often sell shares for personal reasons, such as diversification or liquidity needs, which may have nothing to do with the company’s performance. His second rule focuses on clusters of insider buying, where multiple insiders purchase shares around the same time, suggesting a shared belief in the stock’s potential.

His third rule highlights the importance of large purchases, specifically those worth $500,000 or more. Brush also emphasises that the most meaningful signals come from insiders deeply involved in the company’s operations and strategy. Purchases by big investors who are classified as insiders solely due to their large holdings are excluded, as their buys may not stem from an operational understanding of the business.

When an executive or director uses personal funds to buy shares in the open market, it signals confidence in the current stock price. However, Brush notes that insider buying alone should not be the sole reason to invest in a company. The broader prospects of the business must also be taken into account. Insider buying can be a powerful signal, particularly when it involves key decision-makers and substantial amounts. Yet, it should be considered alongside other factors before making investment decisions. Brush’s rules help investors distinguish between meaningful activity and noise in the market.