As a Gauge of Stock Market Health, Which Indicator Should You Be Looking At? Insider Buying or Insider Selling?

Investors keeping tabs on corporate executive trading might view recent transaction patterns as a clear signal to dump U.S. stocks. While recent data shows corporate executives sold much more than they bought in June 2025, this pattern is actually normal and far less meaningful than most investors realize.

The reason is simple: executives sell their company stock for dozens of personal reasons—from tax planning to buying a house—but they typically only buy for one reason: they believe the stock price will rise.

How Insider Trading Can Signal Market Trends

When a high-ranking employee buys or sells shares in the company they work for, it’s tempting to try to read between the lines. These people are privy to information the average investor doesn’t have access to.

Federal law requires that directors and major shareholders (those owning more than 10% of the company’s stock) can only trade based on public information, not on insider secrets that could influence stock prices. This is supposed to prevent unfair advantages and, in theory, make buying and selling activity harder to interpret.

Of course, this doesn’t stop savvy investors from trying to read the tea leaves. Many believe executives find creative ways to signal their true feelings about their company’s prospects, making their trading patterns worth watching—even if the law says they shouldn’t have any special advantage.

Insider Buying vs. Insider Selling

There are Wall Street analysts who argue that investors should pay more attention to insider buying than selling. Selling, the theory goes, is harder to interpret as a sign of bearishness because it’s often prescheduled or triggered by immediate needs, such as estate and tax planning, diversification of personal wealth, or funding large expenditures, rather than a lack of confidence.

As famed investor Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” That observation helps explain why there’s usually much more selling than buying activity.

When Insider Trades Matter

Treat insider trades as one piece of a larger puzzle, not as crystal clear buy or sell signals. Research consistently shows that while insider purchases can predict stock performance, the effect isn’t magic—it’s modest and requires careful interpretation.

A classic study by University of Illinois researchers Josef Lakonishok and Inmoo Lee found that insider purchases do outperform insider sales, but the difference amounts to about 4.8% annually—meaningful but hardly a guarantee of riches. More importantly, their research showed that insider selling appears to have no predictive ability, while any information gleaned is derived mainly from stock purchases.

More recent research from the Journal of Banking & Finance adds a fascinating wrinkle: insiders often trade in the opposite direction of analyst recommendations. When analysts downgrade a stock, insider buying actually increases significantly. This contrarian behavior suggests executives are using their superior knowledge to disagree with negative market sentiment, buying when others are pessimistic. The study found that stocks with insider buying following analyst downgrades experience significantly higher returns, proving that insiders’ contrarian instincts often pay off.

The Bottom Line

The next time you see a director buying or selling stock, think before you are tempted to act. Yes, these transactions can occasionally suggest the shares are under- or overvalued. However, in most cases, they are routine and influenced by other factors.