diff --git a/packages/client/src/components/Component.svelte b/packages/client/src/components/Component.svelte
index 414d87a0aa..a7ac7b0cd0 100644
--- a/packages/client/src/components/Component.svelte
+++ b/packages/client/src/components/Component.svelte
@@ -181,7 +181,8 @@
       data-id={id}
       data-name={name}
       data-draggable={interactive && !isLayout && !isScreen ? "true" : "false"}
-      data-droppable={definition?.hasChildren ? "true" : "false"}
+      data-droppable={interactive ? "true" : "false"}
+      data-droppable-inside={definition?.hasChildren ? "true" : "false"}
     >
       <svelte:component this={constructor} {...componentSettings}>
         {#if children.length}
diff --git a/packages/client/src/components/preview/DNDHandler.svelte b/packages/client/src/components/preview/DNDHandler.svelte
index 88b9176efb..c3630051ee 100644
--- a/packages/client/src/components/preview/DNDHandler.svelte
+++ b/packages/client/src/components/preview/DNDHandler.svelte
@@ -1,36 +1,116 @@
 <script>
   import { onMount } from "svelte"
   import IndicatorSet from "./IndicatorSet.svelte"
+  import DNDPositionIndicator from "./DNDPositionIndicator.svelte"
   import { builderStore } from "stores"
 
   let dragTarget
   let dropTarget
+  let dropMode
+  let dropInfo
+
+  const getDOMNodeForComponent = component => {
+    const parent = component.closest("[data-type='component']")
+    const children = Array.from(parent.childNodes)
+    return children?.find(node => node?.nodeType === 1)
+  }
 
   // Callback when initially starting a drag on a draggable component
   const onDragStart = e => {
+    // Update state
     dragTarget = e.target.dataset.componentId
-    e.target.style.opacity = 0.5
+    builderStore.actions.selectComponent(dragTarget)
+    builderStore.actions.showHoverIndicator(false)
+
+    // Highlight being dragged by setting opacity
+    const child = getDOMNodeForComponent(e.target)
+    console.log(child)
+    if (child) {
+      console.log("set opacity")
+      child.style.opacity = "0.5"
+    }
   }
 
   // Callback when drag stops (whether dropped or not)
   const onDragEnd = e => {
-    // reset the transparency
-    dragTarget = null
-    e.target.style.opacity = ""
+    // Reset state and styles
     dropTarget = null
+    dropInfo = null
+
+    // Reset opacity style
+    const child = getDOMNodeForComponent(e.target)
+    if (child) {
+      child.style.opacity = ""
+    }
+
+    // Re-enable the hover indicator
+    builderStore.actions.showHoverIndicator(true)
   }
 
   // Callback when on top of a component
   const onDragOver = e => {
     e.preventDefault()
+
+    if (dropInfo) {
+      const { droppableInside, bounds } = dropInfo
+      const { top, height } = bounds
+      const mouseY = e.clientY
+      const elTop = top
+      const elBottom = top + height
+
+      // Determine which edge we're nearest as this is needed for potentially
+      // any drop mode
+      let nearestEdge
+      if (Math.abs(elTop - mouseY) < Math.abs(elBottom - mouseY)) {
+        nearestEdge = "above"
+      } else {
+        nearestEdge = "below"
+      }
+
+      // If not available to drop inside, just check whether we are closer
+      // to the top or bottom
+      if (!droppableInside) {
+        dropMode = nearestEdge
+      }
+
+      // Otherwise determine whether the user wants to drop inside or at
+      // either edge
+      else {
+        const edgeLimit = Math.min(40, height * 0.33)
+        const insideLimit = [
+          Math.round(top + edgeLimit),
+          Math.round(top + height - edgeLimit),
+        ]
+        if (mouseY >= insideLimit[0] && mouseY <= insideLimit[1]) {
+          dropMode = "inside"
+        } else {
+          dropMode = nearestEdge
+        }
+      }
+    }
   }
 
   // Callback when entering a potential drop target
   const onDragEnter = e => {
     const element = e.target.closest("[data-type='component']")
-    if (element && element.dataset.droppable === "true") {
+    if (
+      element &&
+      element.dataset.droppable &&
+      element.dataset.id !== dragTarget
+    ) {
+      // Store target ID
       dropTarget = element.dataset.id
+
+      // Precompute and store some info to avoid recalculating everything in
+      // dragOver
+      const child = getDOMNodeForComponent(e.target)
+      const bounds = child.getBoundingClientRect()
+      dropInfo = {
+        droppableInside: element.dataset.droppableInside === "true",
+        bounds,
+      }
     } else {
+      dropInfo = null
       dropTarget = null
     }
   }
@@ -42,11 +122,8 @@
   // Callback when dropping a drag on top of some component
   const onDrop = e => {
     e.preventDefault()
-
-    // Check if the target is droppable
-    const element = e.target.closest("[data-type='component']")
-    if (element && element.dataset.droppable === "true") {
-      builderStore.actions.moveComponent(dragTarget, dropTarget, "inside")
+    if (dropTarget && dropMode) {
+      builderStore.actions.moveComponent(dragTarget, dropTarget, dropMode)
     }
   }
 
@@ -76,8 +153,13 @@
 </script>
 
 <IndicatorSet
-  componentId={dropTarget}
-  color="var(--spectrum-global-color-static-red-600)"
+  componentId={dropMode === "inside" ? dropTarget : null}
+  color="var(--spectrum-global-color-static-green-500)"
   zIndex="930"
   transition
+  prefix="Inside"
 />
+
+{#if dropMode !== "inside" && dropInfo}
+  <DNDPositionIndicator bounds={dropInfo.bounds} mode={dropMode} zIndex="940" />
+{/if}
diff --git a/packages/client/src/components/preview/DNDPositionIndicator.svelte b/packages/client/src/components/preview/DNDPositionIndicator.svelte
index e69de29bb2..d86b79b88f 100644
--- a/packages/client/src/components/preview/DNDPositionIndicator.svelte
+++ b/packages/client/src/components/preview/DNDPositionIndicator.svelte
@@ -0,0 +1,33 @@
+<script>
+  export let bounds
+  export let mode
+  export let zIndex
+
+  $: x = bounds?.left
+  $: y = getYPos(bounds, mode)
+  $: width = bounds?.width
+  $: valid = bounds != null
+
+  const getYPos = (bounds, mode) => {
+    if (!bounds || !mode) {
+      return null
+    }
+    const { top, height } = bounds
+    return mode === "above" ? top - 2 : top + height
+  }
+</script>
+
+{#if valid}
+  <div
+    class="indicator"
+    style={`top:${y}px;left:${x}px;width:${width}px;z-index:${zIndex};`}
+  />
+{/if}
+
+<style>
+  .indicator {
+    position: absolute;
+    height: 2px;
+    background: var(--spectrum-global-color-static-green-500);
+  }
+</style>
diff --git a/packages/client/src/components/preview/HoverIndicator.svelte b/packages/client/src/components/preview/HoverIndicator.svelte
index 9518c6d101..3cae1e4c85 100644
--- a/packages/client/src/components/preview/HoverIndicator.svelte
+++ b/packages/client/src/components/preview/HoverIndicator.svelte
@@ -30,7 +30,7 @@
 </script>
 
 <IndicatorSet
-  {componentId}
+  componentId={$builderStore.showHoverIndicator ? componentId : null}
   color="var(--spectrum-global-color-static-blue-200)"
   transition
   {zIndex}
diff --git a/packages/client/src/components/preview/IndicatorSet.svelte b/packages/client/src/components/preview/IndicatorSet.svelte
index 957c7d7bef..012aa7e470 100644
--- a/packages/client/src/components/preview/IndicatorSet.svelte
+++ b/packages/client/src/components/preview/IndicatorSet.svelte
@@ -7,6 +7,7 @@
   export let color
   export let transition
   export let zIndex
+  export let prefix = null
 
   let indicators = []
   let interval
@@ -51,6 +52,9 @@
     const parents = document.getElementsByClassName(componentId)
     if (parents.length) {
       text = parents[0].dataset.name
+      if (prefix) {
+        text = `${prefix} ${text}`
+      }
     }
 
     // Batch reads to minimize reflow
diff --git a/packages/client/src/stores/builder.js b/packages/client/src/stores/builder.js
index 3a7eb1df61..ce653a8fc1 100644
--- a/packages/client/src/stores/builder.js
+++ b/packages/client/src/stores/builder.js
@@ -23,6 +23,7 @@ const createBuilderStore = () => {
     theme: null,
     customTheme: null,
     previewDevice: "desktop",
+    showHoverIndicator: true,
   }
   const writableStore = writable(initialState)
   const derivedStore = derived(writableStore, $state => {
@@ -76,9 +77,16 @@ const createBuilderStore = () => {
         mode,
       })
     },
+    showHoverIndicator: show => {
+      writableStore.update(state => {
+        state.showHoverIndicator = show
+        return state
+      })
+    },
   }
   return {
     ...writableStore,
+    set: state => writableStore.set({ ...initialState, ...state }),
     subscribe: derivedStore.subscribe,
     actions,
   }
diff --git a/packages/client/src/utils/styleable.js b/packages/client/src/utils/styleable.js
index 27f6c6a0f6..899854ecc9 100644
--- a/packages/client/src/utils/styleable.js
+++ b/packages/client/src/utils/styleable.js
@@ -33,6 +33,7 @@ export const styleable = (node, styles = {}) => {
   const setupStyles = (newStyles = {}) => {
     // Use empty state styles as base styles if required, but let them, get
     // overridden by any user specified styles
+    const baseString = node.style.cssText
     let baseStyles = {}
     if (newStyles.empty) {
       baseStyles.border = "2px dashed var(--spectrum-global-color-gray-600)"
@@ -50,7 +51,7 @@ export const styleable = (node, styles = {}) => {
 
     // Applies a style string to a DOM node
     const applyStyles = styleString => {
-      node.style = styleString
+      node.style = `${baseString}${styleString}`
       node.dataset.componentId = componentId
     }