Prominent insider shareholders of Santa Clara-based Nvidia Corp. (NVDA) have been selling stock over the last three months raising the question, is insider selling a bad sign for investors? Nvidia, which primarily designs graphic processing units for the gaming industry has been one of the hot stocks of 2017, rising by 55 percent since January.

In June, Nvidia Director Robert Burgess sold 50,000 shares at an average price of $158.08, for a total value of $7.9 million, according to a SEC filing. More recently, Director A Brooke Seawell sold 30,000 shares at an average share price of $170.19, a total value of just over $5 million. Burgess and Seawell now own a combined total of 30,857 shares. In the last three months, insiders have sold over 400,000 shares at a total value of $61.8 million, according to Nasdaq data. 

According to FactSet data, insiders make up 4.86 percent of company ownership, which has been on the decline in recent months. 

The string of insider selling is following an overall trend of outflows. On Thursday, the company recorded net outflows of $39.78 million according to online publication Dispatch Tribunal. (See also: How Broadcom Will Beat Nvidia.)

Is Insider Selling a Bad Sign?

For stock owners, news that insiders are selling can be frightening. Why are they selling? What do they know? In 2010, holders of the second biggest company in the U.S., Google Inc. (GOOGL) were given a scare when they woke up to the news that "Google co-founders Larry Page and Sergey Brin plan to steadily sell off up to 10 million shares of stock over the next five years, according to a SEC filing.” However, since then shares in the California-based tech giant have nearly doubled, so it turns out their panic was misplaced. (See also: How To Sell Stock In Your Company)

Situations where investors should not be alarmed are when insiders announce they plan to sell a number of shares over a longer period, such as the Page and Brin example. In addition, if the stock has had a significant rally an inside investor may think it's prudent to take some profit. Finally, if it is just one insider that is selling, investors should not be too concerned. (See also: Insider Selling Isn't Always A Bad Sign)

On the contrary, if multiple insiders are selling stock at the same it may be a sign that they know something. Additionally, if owners have a history of selling before the stock falls it may also be a red flag. 

Take Away

While owning shares in a company where insiders are selling their stake may put investors in a precarious position, in general, this is not a time to panic. Maybe they have an overall view of the wider stock market, which is not a company specific news, or maybe they just want to fund a summer vacation. 

With heightened regulation in markets and disclosure policies, it is safe to say if an insider selling his or her shares and the stock falls sharply, they could be in bigger trouble than you: the investor. 


Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.