← Back to Trades · Updated April 2026 · 10 min read

How InsiderScore™ Works: Our CFA-Designed Methodology

The SEC processes over 150,000 Form 4 filings per year. The vast majority are noise — routine compensation events, tax withholding, and small transactions with no predictive value. InsiderScore™ is InsiderBrief’s proprietary scoring methodology that separates signal from noise. Designed by a CFA charterholder and grounded in decades of academic research, it evaluates every filing across multiple dimensions to produce a single conviction score.

Design philosophy: InsiderScore is not a black box. We believe that a scoring methodology is only useful if investors understand why a trade received a particular score. Transparency builds trust, and trust is the foundation of any analytical product. This article explains every factor in our system.

The Six Scoring Factors

InsiderScore evaluates every Form 4 filing across six weighted factors. Each factor is grounded in academic research demonstrating its predictive power for future stock returns.

Factor 1: Transaction Type

Weight: High

Open-market purchases (code P) receive the highest base score. Discretionary sales (code S) without a 10b5-1 flag receive a moderate score. All other transaction types — option exercises, grants, tax withholding, gifts — receive near-zero scores. This single filter eliminates approximately 70% of all filings. See our complete transaction codes guide for details on each code.

Factor 2: Dollar Magnitude

Weight: High

The total dollar value of the transaction is a direct proxy for conviction. InsiderScore applies a logarithmic scaling function: a $100K purchase receives a baseline score, with increasing but diminishing returns up to $10M+. We also normalize against the insider’s estimated total compensation to assess the “skin in the game” ratio — a $500K purchase by a CEO earning $20M annually is less impressive than the same purchase by a VP earning $300K.

Factor 3: Insider Seniority

Weight: Moderate

Research consistently shows that C-suite executives (CEO, CFO, COO) generate more informative signals than board directors, who in turn generate more informative signals than 10% beneficial owners. InsiderScore assigns a seniority multiplier based on the insider’s relationship code in the filing. Multiple roles (e.g., a director who is also CEO) receive the highest applicable multiplier.

Factor 4: Cluster Activity

Weight: Very High

Cluster buys — three or more insiders purchasing within a 30-day window — are the single most predictive insider trading pattern. When a cluster is detected, InsiderScore applies a significant multiplier to all qualifying trades in the cluster. The multiplier increases with the number of participating insiders and the aggregate dollar value. Cluster sells receive a similar but smaller multiplier on the negative side.

Factor 5: Market Context

Weight: Moderate

Contrarian purchases — buying when the stock is near 52-week lows or after a significant drawdown — generate stronger forward returns than purchases in stocks already trending upward. InsiderScore evaluates the stock’s current price relative to its 52-week range, recent return (30-day and 90-day), and proximity to the next earnings date. Purchases near 52-week lows receive a context bonus; purchases after strong run-ups receive a context penalty.

Factor 6: Behavioral Rarity

Weight: Moderate

An insider who buys shares every quarter is providing a steady signal but with diminishing marginal information. An insider who has neverpreviously bought in the open market and suddenly makes a large purchase is making a far more unusual — and therefore more informative — statement. InsiderScore evaluates the insider’s historical transaction frequency and applies a rarity bonus for first-time or infrequent buyers. Habitual traders receive a slight discount.

Score Calculation

The six factors are combined using a weighted scoring model. The exact weights are calibrated quarterly using backtesting against historical returns data. While we disclose the factors and their relative importance, the precise weights and calibration parameters are proprietary.

The final InsiderScore is expressed on a 0-100 scale:

80-100: Exceptional conviction. Rare — fewer than 5% of all filings. These trades are featured prominently in our daily intelligence briefs.
60-79: High conviction. Noteworthy transactions that merit attention and appear in daily briefs with full analysis.
40-59: Moderate signal. Interesting but not compelling on their own. May appear in weekly roundup briefs.
Below 40: Low signal. Routine compensation activity, small transactions, or 10b5-1 plan sales. Filtered out of briefs.

What InsiderScore Does Not Do

Transparency requires acknowledging limitations:

InsiderScore does not predict stock prices. It scores the informational quality of an insider trade. A score of 90 means the trade is highly informative, not that the stock will definitely go up.
InsiderScore does not replace fundamental analysis. An insider buying stock in a company with deteriorating fundamentals may be wrong. The score measures insider conviction, not business quality.
InsiderScore is not investment advice. It is a research tool designed to help investors prioritize which insider trades deserve deeper investigation.

Backtesting and Validation

InsiderScore is backtested against a 10-year historical dataset of Form 4 filings paired with forward stock returns. We evaluate performance using standard statistical measures including information coefficient, hit rate (percentage of high-scoring trades followed by positive returns), and risk-adjusted alpha (Sharpe ratio of a hypothetical portfolio that follows high-score trades).

The model is recalibrated quarterly to account for evolving market dynamics. Historical backtests are not published publicly to prevent data-mining and overfitting by third parties, but summary performance metrics are available to institutional subscribers upon request.

Why CFA-Designed Matters

The CFA (Chartered Financial Analyst) designation represents the gold standard in investment analysis education. Our methodology was designed by a CFA charterholder with direct experience in equity research and quantitative investing. This means InsiderScore is built on:

Rigorous statistical methodology, not heuristics or gut feeling
Grounding in the academic literature on insider trading predictability
Professional standards of transparency and ethical conduct
Awareness of behavioral biases that can distort naive scoring approaches

InsiderScore is not a marketing gimmick. It is a serious analytical tool designed to meet the standards that professional investors expect.

Disclaimer:InsiderBrief provides informational content and analytical tools for educational purposes. Nothing on this site constitutes investment advice, a recommendation to buy or sell any security, or an offer to transact. Always conduct your own due diligence and consult a licensed financial advisor before making investment decisions. Past insider trading patterns do not guarantee future stock performance. InsiderScore™ is a proprietary scoring methodology and does not guarantee any investment outcome.