The insider buy/sell ratio compares the number or dollar value of open-market purchases to sales by corporate insiders (officers, directors, and 10% owners) as reported in SEC Form 4 filings. A ratio above 1.0 indicates more buying than selling, which some investors interpret as a bullish signal.

A Form 4 is a document filed with the SEC whenever a corporate insider — such as an officer, director, or beneficial owner of more than 10% of a company’s shares — buys or sells stock in that company. Insiders must file within two business days of the transaction.

Average Insider calculates the ratio using the total dollar value of open-market purchases (transaction code P) divided by the total dollar value of open-market sales (transaction code S) from SEC Form 4 filings within the selected time period. Derivative transactions and non-market transfers are excluded.

Corporate insiders have deep knowledge of their company’s prospects. Academic research has shown that insider purchases, particularly cluster buys (multiple insiders buying around the same time), can be predictive of future stock performance. However, insider sales are less informative since insiders sell for many reasons unrelated to company outlook (diversification, taxes, etc.).