Are insider stock purchases really positive for the stock?

It's an old stock market saying: if a company's management buys shares, it's a positive sign. That feels instinctively correct: a company manager or manager knows his company best, and is therefore best able to assess whether their own share is over- or undervalued. So if he or she buys more shares with their own money, that should be a positive indicator for investors. But is it also true if hard numbers are added?

An interesting study by the Wall Street Journal examined 1,400 insider purchases made by managers of S&P500 companies. This shows 2 things:

1) Insiders often buy after the stock has fallen sharply. There is a logical explanation for this in itself: It is a way for business leaders to send a signal of confidence to the market: “The stock was recently punished, but we still believe in it!”

2) On average, the stock price rises 2% in the month after insider purchases. After that, the effect played out. Although averages don't mean everything, of course: in 39% of cases, the insider's investment is at a loss after 1 month.

In short: insider purchases are therefore definitely a positive signal. However, the effect should not be overestimated either. And for a long-term investor, although it is “nice to have insiders on the buy side”, it is certainly not a sufficient condition to buy more blindly “because an insider also bought”.

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Source: https://www.wsj.com/finance/stocks/is-it-really-a-good-sign-when-executives-buy-their-own-stock-we-ran-the-numbers-2655b232?mod=Searchresults&pos=1&page=1

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