Legal insider trading refers to the purchases and sales of shares by a company's executives and directors, disclosed to market authorities. Insider purchases are an often predictive signal: no one knows a company better than those who run it.
Why are insider purchases a signal?
An executive may sell for a thousand reasons (diversification, taxes, a property purchase), but only buys their own shares heavily for one: they think the shares will rise. That is why purchases are more informative than sales.
How to read the signal correctly?
Look at the buy/sell ratio over 90 days, the rank of the buyers (a CEO's purchase carries more weight than a manager's), and the size of the transactions. Several executives buying at the same time form a strong signal.
What are the limits?
Insiders' timing is not perfect: they sometimes buy too early. The signal should be combined with the other dimensions (earnings, momentum, quality) rather than used alone.
What about tracking the US Congress?
The transactions of members of the US Congress, also disclosed, are tracked for the same reasons. They round out the "smart money" picture.
This is not investment advice.