Why Nvidia Stock Rallied on Tuesday

Shares of Nvidia (NASDAQ: NVDA) surged higher on Tuesday, jumping as much as 4.8%. As of 3:20 p.m. ET, the stock was still up 4%.

The catalyst that sent the chipmaker and artificial intelligence (AI) specialist higher were reports that the company's chief executive was done selling stock for now.

Sales of more than $700 million

CEO Jensen Huang has sold a large block of Nvidia stock in recent months, a move that caught the attention of investors. In all, he sold roughly 6 million shares worth roughly $713 million as part of a prearranged stock trading plan put in place earlier this year.

The sales were made pursuant to a 10b5-1 plan, which allows insiders to sell stock in the future according to a predetermined schedule without running afoul of insider trading rules. In more than four dozen transactions over the past three months, Huang divested 6 million shares, reaching the limit set up in the prearranged plan, suggesting the chief executive was done selling Nvidia stock -- at least for now.

Some investors tend to get nervous when insiders sell stock, particularly in large quantities. Rumors that "they know something we don't" or "the stock has peaked" tend to make the rounds.

The reality is much more mundane

However, there are plenty of reasons to sell stock, especially if it makes up a large part of an executive's compensation package. That's certainly the case with Huang, as 96% of his total pay is stock options tied to Nvidia's overall stock performance. As a result, and in order to reap the rewards of successfully navigating the stock to new heights, Huang and other executives must sell stock, so there's nothing concerning or nefarious about these sales.

Furthermore, Huang is still the largest individual holder of Nvidia stock. According to the company's most recent proxy statement, Huang controlled more than 93 million shares, or more than 3.75% of the outstanding stock. This alone suggests that Huang is still confident in Nvidia's future prospects.

In short: Nothing to see here, folks. Move it along.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.