What is the Insider Net Purchases Screen?
The Insider Net Purchases Screen is a rules-based strategy with no single author behind it. Rather than follow one investor's philosophy, it reads a public data trail: the open-market buying and selling that corporate insiders are required to report to the Securities and Exchange Commission on Form 4. The Securities Exchange Act of 1934 defines an insider as an officer, a director, or anyone holding 10% or more of a company's stock — the people with the closest view of the business. When more of them are buying shares than selling, the Insider Net Purchases Screen flags the company for a closer look.
The core idea
Net purchases are plain arithmetic: shares insiders bought minus shares they sold over a set window, here the last six months. A positive figure means insiders were net buyers as a group. The signal rests on an asymmetry. Insiders sell for reasons that say nothing about the company — a tax bill, a divorce, a second home, or simple diversification after years of being paid in stock. They buy for essentially one reason: they think the shares are worth more than the price. An executive putting personal cash into stock at the full market price is making a costlier, more revealing bet than one exercising options granted at a discount. The screen also weighs breadth. One insider buying can be idiosyncratic; three or more buying inside the same six months is harder to dismiss.
What the Insider Net Purchases Screen looks for
- Market capitalization for the most recent fiscal quarter between $50 million and $1 billion — deliberately small, where insider signals tend to carry more weight.
- Companies traded over the counter (OTC) are excluded.
- Companies in the miscellaneous financial services and real estate operations industries are excluded, which removes closed-end funds and REITs.
- At least three different insiders bought shares during the last six months.
- Net shares purchased — shares bought minus shares sold by insiders — over the last six months is greater than zero.
- Insiders placed more buy trades than sell trades over the same six months.
- Net shares purchased over the last six months equal more than 2% of total shares outstanding.
- The percentage threshold is tightened so that only 30 companies survive to the final list.
Why it can work
The case is more than intuition. Research covering the ten years through 1996 found that portfolios assembled from insider buy transactions, rebuilt on a rolling twelve-month basis, beat the market by more than 7% a year. Two details sharpen the point. About two-thirds of that excess return arrived only after 30 days had passed since the trade, so the lag between an insider's purchase and its public filing does not shut outside investors out. And the effect was strongest in smaller companies — insider buys at small- and mid-cap firms outran insider buys at large caps. That is the logic behind capping market value at $1 billion. A purchase by an executive at a lightly covered $300 million company carries more information than the same dollars spent at a business every analyst already tracks.
What to keep in mind
Two limits deserve real weight. Insiders are early. The outperformance in those studies showed up roughly a month after the trade, not the day it was filed, and sometimes the stock never rewards them at all — being right about the business and right about the timing are separate things. Significant insider buying points to long-term value, not a quick move. Second, legal, reported buying is not certainty. Executives are sometimes required to hold stock, and loan-assisted purchase programs can put an insider's name on the buy side without much personal risk. The screen is also concentrated by design: 30 small-cap names, thinner trading, sharper price swings. It ignores insider selling entirely, and for good reason — sell data has shown little predictive value, while the buys are where the signal lives.
Sources
Insider reporting requirements: the Securities Exchange Act of 1934 and SEC Forms 3, 4, and 5.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.