Trading by those in the know

There is a vast industry of market experts who attempt to guide us on future moves in share prices, often based on nebulous macroeconomic factors such as concerns about rising bond yields or market attitudes to risk. Still, these rarely have a significant impact on the inherent valuation of an individual company, causing its share price to diverge significantly from the rest of the market. 

Whilst sell-side analyst reports are a great source of background information on factors influencing a company, they rarely consistently identify near-term structural issues that drive large share price moves and frequently present the most positive view of a company. 

Indeed, as brokerage commissions continue to fall, sell-side analysts are increasingly incentivised to maintain a good relationship with company management to protect investment banking relationships. The bank is unlikely to secure a lucrative equity raise or debt issuance if its analyst has a strong sell rating on the company.

We see that a consistently underappreciated source of intelligence on the prospects of an individual company is insider trading in that company. Often, large and unusual sales can be the “canary in the coal mine”, occurring before weakness in the company’s share price.

In this week’s piece, we are going to look at trading by insiders and how to interpret trade notifications. We are not going to look at the illegal act of insider trading per se, which carries prison sentences, but rather at how trades by key personnel can help frame an investment decision. In my experience, management teams tend to view their personal holdings through a less rose-coloured lens.

Insiders and insider trading

Insiders are defined as “key management personnel” or “those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director of that entity”.

The ASX listing rules, in conjunction with the Corporations Act, require that key management personnel notify the market within five days of changes that occur to that person’s holdings in the listed company. These changes are posted to the ASX and, quite helpfully, are collated in the financial press daily in the back of the markets section. Additionally, ASIC requires that substantial investors (defined as owning more than 5% of a listed company) notify the market of any change in their holding of 1% or more.

Rationale for rules

Most investors agree that it is generally beneficial for directors and key employees of a listed company to own securities in the entity, and I personally view it negatively when researching a company where directors or senior management own minimal shares. I find the justifications inevitably provided that this “gives the directors greater independence” or that “they have enough financial exposure to the company” are weak.

Investing alongside other shareholders gives them a larger stake in the entity's success and helps align their interests with those of investors. The downside is that these insiders will often be, or be perceived to be, in possession of “market sensitive information” or “inside information” concerning the company that is not generally available to investors. 

These insiders also have legal obligations not to engage in insider trading or market manipulation, and not to use information acquired in their capacity as directors or employees to gain an improper advantage for themselves[i].

Examples of sensitive information include dividends, a financial outlook that differs from consensus, upcoming litigation or regulatory investigations, and changes to the company’s structure, such as dilutive capital raisings or buybacks.

The temptation

Key personnel who come into possession of negative information or deeper concerns about factors affecting the company’s business that may cause large declines in their personal wealth face powerful temptations to sell shares.

Typically, insiders frame their decision to sell large percentages of their holdings in the company as due to a desire to rebalance their portfolios, buy a beach house, or, my personal favourite, pay a tax bill. 

Just before the GFC, the CFO of a major insurance services company sold the bulk of his holdings in his company. When I asked him about it, he told me that this was due to the tax bill he faced due to the recent exercise of some options. After calculating that his sales were approximately 10 times his tax bill, we also decided to reduce our position in the company. 

Whilst I am not suggesting any impropriety occurred in this case, over the next nine months, the company’s share price fell by 50% and took 10 years to recover to the level at which he sold his holdings.

Recent activity

The past year has been a banner year for the informational value of insider trades. In November, market darling DroneShield (DRO) saw a large cluster of director disposals totalling $70 million. Here, the CEO, the Chairman, and one of the directors sold approximately $70 million in stock, representing nearly the entirety of their holdings. 

These trades triggered a formal ASIC investigation in 2026, as the sales seemed to occur after an error in announcing a contract win. Upon announcing these insider sales, DroneShield’s share price fell 49%, and while it has recovered to $2.33, it remains below the estimated insider selling price of $2.34.

Earlier this week, Xero's (XRO) CEO sold all her shares in the company for tax reasons for around $76. This surprised the market (triggering a 7% fall in the share price), as many, including myself, thought the company’s share price might rebound after falling 68% in the 2026 financial year and trading at five-year lows.

Unfortunately, these insider sales coincided with the company’s chairman meeting with investors to reprice executive options down from $171 to a level closer to the current share price of $69. While we have no understanding of an individual's tax situation, when a key insider is selling large amounts of their holdings in a company, it would be brave for an investor with limited publicly available information to take the other side of this trade.

It is not always grim news ahead

One of the most powerful buying signals for investors is when directors and management buy their own stock in the open market. From the ASX notices, you have to dig into the details to see that this buying involves the insider using their own cold, hard cash, not simply the granting of stock to meet performance hurdles.

Late February 2026 saw strong insider buying in medical tech company ProMedicus (PME) post the release of their results at around $110 per share. The company’s share price had fallen precipitously amid concerns around the SaaS apocalypse. This insider buying proved to be a very strong signal, occurring at the year's low point, with the share price recovering to $194.

Our take

Company management teams invariably present the most positive view of their company, as the personalities of the individuals who reach the top in large companies are almost always positive and hardworking. Also, increasingly much of the investment research published by the investment banks has become slanted towards a positive view of the companies they cover. 

Whilst we would not advocate trading by insiders as the sole rationale for making an investment decision, if an investor is nervous about either the valuation of a stock held or the implications of a significant change, we see that selling by management or directors is a strong indicator for investors to review their holdings in that company immediately.