The Insider Following Strategy

The short version

An insider following strategy means using the purchases that company executives, directors and large owners make with their own money as a starting point for your own investment ideas. In the United States these people must report every trade on SEC Form 4 within two business days, so their decisions become public almost immediately. The strategy rests on one idea: an insider who spends their own cash on the open market, at the same price as everyone else, probably thinks the shares are worth more.

The evidence says the idea has something to it, but much less than many websites suggest. Insider purchases have beaten the market on average in academic studies, mostly at small companies and mostly in the months after the trade. The typical single purchase, though, does about as well as the index. The edge comes from filtering: knowing which purchases carry information and which are noise.

This guide explains how the strategy works, which filters matter, how to put it into practice, and where it fails.

Why insider purchases can carry information

Insiders know their business better than anyone outside. They see orders, costs, hiring and the mood inside the company months before it shows up in a quarterly report. Using material non-public information to trade is illegal, and insiders are restricted to trading windows, usually the weeks after an earnings report. But they are allowed to act on their general judgment about the company’s prospects, and that judgment is often good.

Purchases are more useful than sales for a simple reason. Insiders sell for many ordinary reasons: their pay comes in stock, they owe taxes when shares vest, they want to buy a house or spread their wealth. A purchase has fewer explanations. Peter Lynch put it well in his 1989 book One Up on Wall Street: insiders sell for many reasons but buy for only one. Our own test of that line, on thousands of real filings, checks whether it still holds.

What the research says

Several decades of academic work give a consistent picture:

• Purchases beat the market on average. H. Nejat Seyhun’s studies of insider trades from the 1970s to the 1990s found stocks did better than the market in the year after insider purchases. Josef Lakonishok and Inmoo Lee (2001) found the same for purchases and very little predictive power in sales.
• The effect is strongest at small companies. At the largest companies, where hundreds of analysts follow every move, insider purchases add much less.
• Some purchases matter more than others. Cohen, Malloy and Pomorski (2012) showed that “routine” insiders, who buy in the same month every year, carry no information, while “opportunistic” purchases that break a pattern do.
• Clusters matter. When several insiders at the same company buy within a short time, the signal has historically been stronger than a single purchase.

Our 2026 study of every insider purchase shows the same split in recent data: the median purchase roughly kept pace with the S&P 500 over three months, while a minority did very well.

The filters that matter

A raw feed of every insider purchase is mostly noise. These filters are the core of the strategy.

1. Open-market purchases only. On Form 4, transaction code P is an open-market or private purchase. Ignore code A (grants and awards), M (option exercises) and F (shares withheld for tax). Only P means the insider chose to spend their own money.

2. Who is buying. Chief executives and chief financial officers know the most. Outside directors know less, and 10% owners (often funds) may be buying for reasons unrelated to the company’s near-term prospects.

3. Size against their own wealth. A $50,000 purchase by a director who held $100,000 of stock is a much stronger statement than a $1 million purchase by a billionaire founder. Form 4 shows the holding after the trade, so you can work out the percentage added. Our page of all-in insider buys does this for you.

4. Not under a plan. Some purchases are made automatically under a 10b5-1 trading plan set up months earlier. Since 2023 Form 4 has a checkbox for this. Planned purchases say less about current judgment.

5. Breaking a pattern. A first purchase in years, or the first ever, is more informative than a routine annual purchase.

6. Other insiders buying. Two or more insiders buying within 30 days (a cluster) is one of the strongest historical signals.

7. After a fall. Insiders buying after their stock has fallen sharply are disagreeing with the market. That can be very right or very wrong, so it deserves a closer look rather than automatic trust.

The WallStPal Score combines these filters into one number for every purchase on the site, and our public signal log records the highest-scoring purchases each week so you can see how the rule does in real time.

Putting it into practice

A simple, repeatable process:

1. Screen. Each week, list purchases that pass the filters above. The insider purchases page can be sorted by score, size and role.
2. Research. For each candidate, read the company’s latest 10-Q and any 8-K filed since. Ask why the insider might be buying now: a recent fall, a new product, a turnaround.
3. Check the price. If the stock has already jumped since the purchase, much of the signal may be gone. If it is below the insider’s price, you can buy cheaper than they did.
4. Size the position. Never put a large share of your money in one idea. A common rule is to risk no more than 1% to 2% of your portfolio on any single position; the position size calculator does the arithmetic.
5. Set an exit rule in advance. Many insider strategies hold for six to twelve months, the period over which research found most of the effect. Decide your exit before you buy.
6. Keep a record. Write down every trade and why you made it, and compare the results with an index fund.

Testing your rules before using real money

Before you follow any strategy, test it on past data. Our insider buying backtester lets you set rules (role, size, cluster, plan, holding period) and see how purchases matching them did against the S&P 500. Two warnings about backtests: any rule looks good if you try enough variations on the same data, and past results include no trading costs or taxes. Choose a few simple rules for good reasons, then check them on new data as it arrives.

Risks and when it does not work

• Insiders can be wrong. Executives are often optimistic about their own company, and in a market-wide crash their purchases fall with everything else.
• Small companies are volatile. The strongest historical effect is at small companies, where prices can fall 50% quickly and shares can be hard to sell.
• You are always late. You see the purchase up to two business days later, and many traders watch the same filings.
• Concentration. Following a handful of purchases leaves you exposed to a few companies. Diversify across many signals, or keep insider ideas to a small part of your portfolio.
• Costs and taxes. Frequent trading adds costs that backtests leave out.

Examples

A cluster that worked: in February 2016, as bank stocks fell, JPMorgan Chase chief executive Jamie Dimon bought 500,000 shares on the open market for about $26.6 million. It was a large purchase by the CEO, after a fall, and not under a plan. The stock was well above his price within a year.

A purchase that did not work: a chief executive buys $500,000 of stock after a 25% fall, saying the market has overreacted. Two months later the company cuts its forecast and the stock falls another 40%. This happens regularly; open the worst results in our best and worst insider traders ranking to see real cases. Insider confidence is a signal, not a guarantee.

A worked filter: imagine three purchases filed on the same day. A director adds 2% to her holding under a 10b5-1 plan; a 10% owner fund buys $5 million; the CEO, who has never bought before, doubles his holding after a 30% fall, and the CFO buys the next week. Only the third passes most of the filters above.

Explain it like I’m 13

Imagine the cooks at a restaurant are allowed to buy shares of it. If the head chef suddenly spends his own savings on shares, he probably thinks the restaurant will do well, because he knows how busy the kitchen is. But chefs can be wrong too, and sometimes they buy just because they always do. So you look for the strongest signs, like several cooks buying at once, and you never bet all your pocket money on one restaurant.

WallStPal explains public filings. Nothing here is investment advice. Editorial policy · Corrections