Assuming (1) insiders of a company have a good working knowledge of the operations, strategies, and general prospects of that company, and (2) that if an insider buys shares of a company in the open market he/she does so believing at the time of the transaction the market is undervaluing the company’s shares – or otherwise he/she would not have purchased the shares – then an ‘insider purchase event’ may well make the company ‘worth researching’ as a possible investment or trading opportunity.

Having said that, the fact an insider has made an open market purchase doesn’t mean investors and traders should necessarily buy shares in that company. Such a transaction is simply a ‘flag’ that says ‘here is what a supposedly company knowledgeable person has done’ – and ‘perhaps it is worthwhile to expend some research time to determine (if possible) what factor(s) might have caused the insider to purchase shares at that time, and in the quantities they did’. By conducting research on that company investors and traders can then determine (perhaps with the help of their professional advisors) whether the company shares represent a buying opportunity that they might not otherwise have identified, but for taking note of the insider trade ‘flag’.