The short answer
On average, yes, with a lot of fine print. Academic studies have found for decades that stocks tend to do somewhat better than the market after insiders buy them in the open market. Sales carry much less information. The effect is uneven: it is stronger at smaller companies, for purchases that break an insider’s usual pattern, and when several insiders buy together. Many individual purchases still lose money.
What studies have found
Two papers are cited often. Josef Lakonishok and Inmoo Lee, in “Are Insider Trades Informative?” (Review of Financial Studies, 2001), looked at insider trading across U.S. stocks over two decades. They found that insider purchases predicted future returns, mostly at smaller companies, while insider sales did not.
Lauren Cohen, Christopher Malloy and Lukasz Pomorski, in “Decoding Inside Information” (Journal of Finance, 2012), split insiders into “routine” traders, who trade in the same month year after year, and “opportunistic” ones, who do not. The routine trades carried essentially no signal. The opportunistic ones did. That is one reason WallStPal points out when a purchase is an insider’s first in a long time.
Why purchases tell you more than sales
An insider can sell for many reasons, from tax bills to diversification to a divorce settlement. There is mostly one reason to buy: the insider thinks the shares are cheap. Executives already have a lot of their wealth tied to the company through pay and grants, so choosing to add more with their own cash is a meaningful decision.
Where the signal is weaker
- Small purchases by directors who are required or encouraged to own a minimum amount of stock.
- Buys made through employee purchase plans, where many officers buy a few shares at the same time.
- Purchases timed around a stock offering, where insiders may be supporting the deal.
- Very large companies, where any one insider’s information matters less to the price.
How to use this
Treat an insider purchase as a reason to look closer, not as a reason to buy. Ask how big the purchase is compared with the insider’s existing holding (WallStPal shows this as “Holding”), whether it is the insider’s first purchase in years, and whether other insiders are buying too. Then look at the business the way you would without the filing.
Examples
JPMorgan Chase, February 2016. Jamie Dimon’s purchase of 500,000 shares for about $26.6 million came during a broad sell-off in bank stocks. It ticked every box the research points to: a top executive, personal money, an unusually large amount, and a purchase that was clearly not routine. The shares recovered over the following year. That one case does not prove the pattern, but it is the kind of trade the studies describe.
Routine buying that looks like a signal. Some companies’ directors buy a fixed dollar amount of stock every quarter. A screen that ranks “number of insider buys” will flag them again and again. Under the Cohen, Malloy and Pomorski approach, those purchases are routine and carry little information. WallStPal’s cluster-buy list requires at least $10,000 from each insider to reduce this kind of noise.
Explain it like I’m 13
Imagine the cook in your school cafeteria spends their own money to buy extra tickets for pizza day. They see the kitchen every day, so they probably know the pizza is going to be good. That is useful information.
If the cook sells their tickets, it could mean anything. Maybe they just do not like pizza, or they need the money for something else.
Researchers have checked this kind of thing with real companies over many years. When the people inside a company buy its stock with their own money, the stock has often done a bit better afterwards. Often, not always.
A note on the numbers
The studies above describe averages over many years and thousands of trades. Results vary by period and method, and past results do not predict future ones. WallStPal shows how stocks moved after each purchase on insider pages so you can judge individual insiders yourself.
WallStPal explains public filings. Nothing here is investment advice. Editorial policy · Corrections