Savvy investors look to see whether corporate “insiders” are buying or selling their company’s stock. “Insiders” are officers, director, or anyone individual owning 10% or more of the outstanding securities of an corporation. These individuals are presumed to know more about the state of the business than anyone else. The laws governing when and how insiders can buy or sell their company stock are strict and strictly enforced.
Assuming that insiders know something about a company that outsiders don’t, it’s telling when insiders are buying or selling.
Most insiders are net sellers because like any smart investor they want to be well diversified. Insiders are often compensated with company stock and stock options, so on net, they will be sellers. But when they stop selling or begin buying that often signals that they believe their company stock is undervalued. They’re not always right,of course, so like any rule of thumb, this one should not be followed without a lot of study.