Reading Insider Trading Signals
6 min read
Director and executive share transactions provide valuable insights into how company insiders view their stock's prospects. Learn how to interpret these signals and what they mean for your investments.
What is Insider Trading? (The Legal Kind)
When we talk about "insider trading" on NZXplorer, we're referring to legal, disclosed transactions by company directors and executives. These are publicly reported to the NZX and can provide valuable investment signals.
Important Legal Note:
All director and executive transactions must be disclosed to the NZX within 5 business days. Illegal insider trading (trading on material non-public information) is prohibited and prosecuted by the Financial Markets Authority.
Interpreting Buy vs Sell Signals
Insider Buying = Bullish Signal
Generally positive for investors
When directors buy shares with their own money, it typically indicates confidence in the company's future prospects.
Strong Buy Signals:
- • Multiple directors buying at once
- • CEO or CFO making large purchases
- • Buying after stock price decline
- • Directors increasing existing positions
Insider Selling = Mixed Signal
Requires more context
Directors sell shares for many reasons (diversification, tax, personal needs). Not all selling is a negative signal.
Red Flag Selling:
- • Multiple insiders selling simultaneously
- • Selling ALL or most of their holdings
- • Selling before bad news announcement
- • Pattern of regular selling at highs
5 Key Factors to Consider
1. Transaction Size
Larger transactions (relative to the insider's total holdings) are more meaningful. A director buying $500,000 worth of shares is more significant than a $10,000 purchase.
2. Timing Context
When did the transaction occur relative to company events and stock price movements?
Example: Directors buying after a significant price drop (30%+) following a profit warning often signals they believe the sell-off was overdone.
3. Pattern vs One-off
Look for patterns over time. Consistent buying by multiple insiders is a stronger signal than a single isolated purchase.
4. Who is Trading?
Some insiders' transactions are more informative than others:
CEO/CFO: Highest signal value - they have the best company information
Operating Executives: Strong signal, especially for their division's performance
Independent Directors: Moderate signal - less daily company involvement
5. Transaction Type
Not all transactions are equal in terms of signal strength:
Strong Signals
- • Open market purchases
- • Options exercised + shares held
- • Buying during blackout exemptions
Weaker Signals
- • Automatic ESPP purchases
- • Options exercised + sold immediately
- • Tax-driven sales
Real-World Examples from NZX
Positive Signal: Coordinated Buying
Hypothetical Example
Company XYZ shares fell 25% after a disappointing earnings report. Within two weeks, three directors (including the CEO and CFO) made on-market purchases totaling $800,000. The stock recovered 40% over the next six months.
✓ Why it worked: Multiple senior insiders buying after a sell-off signaled the market overreacted.
Warning Signal: Heavy Selling
Hypothetical Example
Over three months, four directors at Company ABC sold 60-80% of their shareholdings at prices near $4.50. Six months later, the company issued a profit warning and shares fell to $2.80.
✗ Red flag: Multiple insiders reducing positions significantly before bad news.
Neutral: Option Exercise & Sale
Hypothetical Example
CEO exercises 100,000 options at $2.00 strike price and immediately sells all shares at $5.50 market price. This was part of a pre-announced compensation plan.
⚠ Context matters: Planned exercise-and-sell transactions are less meaningful than discretionary purchases.
How to Track Insider Trading on NZXplorer
NZXplorer makes it easy to monitor director share transactions across the entire NZX:
Key Takeaways
Insider buying is generally a bullish signal, especially when multiple executives are buying
Insider selling requires context - look for patterns and unusual volumes
CEO and CFO transactions carry the most signal value
Timing matters - buying after price drops is more significant than buying at highs
Size matters - larger transactions relative to holdings are more meaningful
Use insider activity as one input alongside other analysis, not the only factor