Form 4s are filings that insiders of publicly traded companies must submit to the Securities and Exchange Commission (SEC) to report changes in their ownership of the company’s securities, aka insider trades.

But who exactly is considered an insider? Directors, officers, and shareholders who own more than 10% of a company’s securities fall into this category. Understanding Form 4s can provide valuable insights for investors, but it’s important to know how to interpret them correctly.

Core Regulations

One of the key regulations associated with Form 4 is the Short-Swing Profit Rule, outlined in Section 16(b) of the Securities Exchange Act. This rule is designed to prevent insiders from profiting from short-term trading based on non-public information.

Here’s how it works:

• Insiders must return any profits made from purchasing and selling (or selling and purchasing) the company’s securities within a six-month period
• This applies regardless of whether the insider actually used inside information
• The company or its shareholders can sue to recover these profits

When looking at Form 4s it is critical to keep this in mind. When you see an insider buy their company, they cannot make any money off of that purchase for at least 6 months which is often a strong signal of confidence. This however is not always the case as trading plans exist which we will cover more later.

Transaction Codes

Form 4s use transaction codes to indicate the nature of each reported transaction. Understanding these codes is crucial for interpreting the filings.

Some common codes include:

• P: Open market or private purchase of non-derivative or derivative security
• S: Open market or private sale of non-derivative or derivative security
• M: Exercise or conversion of derivative security
• G: Gift
• A: Grant, award, or other acquisition

There are many more codes (sec.gov), but most of the time the most useful ones are P and S, open market buys and sells respectively. P and S codes are particularly useful for investors as they represent direct, open-market transactions that often reflect an insider’s confidence in or concerns about the company’s prospects, unlike other codes which may represent more routine or pre-planned transactions. However as mentioned before, trading plans exist and are extremely important to understand.

Trading Plans (Rule 10b5-1 Plans)

Many insiders use pre-arranged trading plans, known as 10b5-1 plans, to buy or sell company stock at predetermined times or prices.

These plans:

• Allow insiders to trade during periods when they might otherwise be prohibited due to possessing material non-public information
• Must be established when the insider doesn’t possess material non-public information
• Are often used to diversify holdings or meet personal financial needs

Transactions made under these plans are still reported on Form 4s, often with a note indicating they were executed under a 10b5-1 plan. It is very important to check the footnotes of the Form 4 you are looking at for trading plans (you can do this easily on Insiderviz!)

Significance for Investors

Form 4 filings can offer valuable insights into how insiders view their company’s prospects. Large purchases might signal confidence, while significant sales could indicate concerns. However, it’s crucial to remember that insider trades are just one signal among many that investors should consider.

Insiders may have various reasons for their trades, including personal financial planning, that don’t necessarily reflect their outlook on the company. Therefore, while Form 4 data can be informative, it should be considered alongside other factors such as:

• Company financial reports
• Industry trends
• Macroeconomic conditions
• Company announcements and news

Insiderviz has a variety of tools that make it extremely easy to find insider trades on the companies you are invested in, as well as find trades from companies you might have never even heard of. Search for a company to get started!

Conclusion

Form 4s provide a window into insider activity at publicly traded companies. While they can offer valuable insights, they’re most useful when considered as part of a broader investment analysis strategy. Tools like Insiderviz can help investors efficiently analyze Form 4 data, making it easier to spot trends and significant transactions.

Remember, successful investing typically involves considering multiple data points and signals – Form 4s are just one piece of the puzzle.