Insider Transactions: Form 4

The Rules

The SEC requires individuals with “beneficial ownership” (including directors and officers as well as any investors who own 10 percent or more of a company’s shares) to file a Form 4 within two days of buying or selling the company’s stock. (They must also report stock received as part of compensation.) Large firms with lots of executives can generate dozens of Form 4 filings in the span of a week, while smaller companies may file just a handful a year.

Form 4 is typically about half a page long. It includes the identity of the buyer or seller, as well as the amount of the transaction. The form also offers details about the type of transaction, such as whether the shares were bought on the open market or by exercising an option. And it may include the motive behind the transaction—for example, if shares were sold to pay a tax liability or traded for another class of the company’s shares.

What to Look For

The information you’ll find on a Form 4 may offer considerable room for interpretation. Here’s a quick review of what you might find and what to make of it:

• Buying by top insiders. You may not have time to track all of a company’s insider transactions. Some firms have scores of bigwigs who are required to file, and many of those individuals may file multiple forms in a given year. Start by reading filings by board members and top corporate officers, who are most likely to know the big picture. It’s also worth tracking filings by individuals who run a firm’s major divisions. Just how bullish is an insider purchase? It depends, in part, on who the buyer is—the bigger the insider’s job, the more weight you should give to his or her transactions. The sheer size of the purchase is another useful clue—especially if it represents a sharp increase in the insider’s total holdings (also reported in the Form 4). And the insider’s track record matters, since some insiders are better at timing their transactions than others. You can find out about an insider’s previous transactions by searching previous filings; that done, check to see how the stock performed in the aftermath of those purchases or sales.
• Selling by top insiders. Insider selling is harder to interpret than insider buying. A big stock sale by a top executive might be a harbinger of bad things to come: Former Countrywide CEO Angelo Mozilo sold $140 million in stock as the company was drowning in toxic loans. Other sales may tell you little or nothing about the insider’s view of his company’s prospects. Take Las Vegas hotelier Steve Wynn’s sale of $114 million in Wynn Resorts stock. Investors might be tempted to dump the stock on such evidence. But a quick Internet search turns up an innocent explanation: Wynn needs the cash to finance his on-going divorce.
• Wider patterns of buying or selling. Top insiders may offer clues to a firm’s prospects, but a wider pattern of buying or selling can be even more useful. Before you make a major decision about a stock, review Form 4 filings by a broad array of insiders to see if they are buying or selling as a group. Their collective on-the-ground wisdom may tell you more about the stock’s prospects than a personal audience with the CEO.

The facts you encounter in a Form 4 are pieces in a larger mosaic. That said, such facts are sometimes important—and occasionally they can be decisive.