SEC Form 4 is used by officers, directors, and other corporate “insiders” to notify the U.S. Securities and Exchange Commission (SEC) of their personal transactions in their company’s securities. Form 4 has to be filed within two business days after a transaction. Insider transactions potentially offer insight into a company’s prospects and financial condition. Form 4 makes this information readily available to everyone.
Learn more about what Form 4 is, and how you can find and use them as an investor.
Definition and Examples of SEC Form 4
Company insiders can acquire stock in several ways. They can purchase the stock with their own funds in a brokerage account, stock purchase plan, or retirement plan such as a 401(k). Or insiders also may receive stock or stock options as part of their compensation.
Form 4 is used to inform the public that an insider transaction has taken place, as well as to provide details about the timing, transaction size, and share price. It also discloses if the shares are directly owned by the insider or indirectly held through a trust or other entity, and the total number of shares held after the transaction. Form 4 uses a series of codes to describe the nature of the transaction, such as a stock award, or option exercise.
Here are some examples:
|A||Grant or award from company|
|D||Sale or transfer back to company|
|M||Exercise of options or other derivatives|
While many of these transactions are routine, sometimes they can have a significant impact, with the market taking notice, especially when the stock is down.
Investors who scrutinize Forms 4 are often most interested in transaction code P. P indicates a direct purchase by the insider, using their own funds.
For example, on March 13, 2020, on the heels of a market sell-off triggered by the uncertainties of the emerging global pandemic, Wells Fargo’s chairman and CEO, Charles Scharf, bought 173,000 shares of the bank’s stock with his own funds—a $5 million purchase. At the time, the stock’s price was down 42% for the year.
How Form 4 Works
Form 4 isn’t limited to corporate officer and director transactions. Purchases and sales by insiders’ family members, trusts, and other organizations that the insider may control also have to be reported. Investors who own 10% or more of the company stock also have to report their transactions on Form 4.
Form 4 is used by shareholders and other groups monitoring stocks’ performances to identify short-swing transactions. Short-swing transactions are an insider’s sale and purchase, or purchase and sale, of company stock within six months. Short swings are prohibited by the Securities Exchange Act of 1934; any profits from them have to be returned to the company. Shareholders can sue an insider to recover short-swing proceeds if the company doesn’t take any action.
As mentioned, insiders must file Form 4s with the SEC within two business days of the transaction. They are submitted electronically via EDGAR, the SEC’s database of company and individual filings about publicly listed companies. Form 4 is available online, free to the public, along with most other EDGAR filings, such as the 10-K and the 8-K. The EDGAR search page has a guide to researching public companies, including how to access Form 4 reports.
Form 4 filings can help you gauge how management views its own company. If there is a consistent trend of insiders buying stock with their own funds, it’s potentially a positive sign.
But in some cases, deciphering insider stock sales and options exercises may not be as clear. Insiders sell for many reasons, and research suggests that in some cases, it could be a positive rather than negative sign.
What It Means to Investors
While insider transactions can offer clues about a company’s stock, they aren’t necessarily a reason in itself for investors to buy or sell. Certain types of buying, like smaller purchases by middle managers, may be more meaningful than others. Another signal for caution: While there are exchange-traded funds (ETFs) for almost any type of investment strategy, none on the market today invests solely on the basis of insider buying.
If you are researching individual stocks, Form 4 is a useful tool, along with fundamental and technical analyses. You can search EDGAR by company name or ticker symbol, as well as by the names of individual officers, directors, and investors.
Unless you are a skilled researcher or know specifically what you are looking for, using EDGAR to look at all of a company’s Form 4 filings can be time-consuming and unproductive. You may want to take advantage of a stock screener or insider-trade tracking service instead.
Screeners are search engines for stocks. Screeners can search thousands of stocks listed on the New York Stock Exchange (NYSE) or Nasdaq Stock Market by hundreds of criteria, including insider buying and selling trends.
Most broker dealers offer online screeners to their clients. There are also online services that track insider trading and provide subscribers with daily reports.
- Companies use SEC Form 4 filings to disclose transactions in a company’s stock by their corporate insiders and people or entities related to them.
- Insider transactions potentially offer investors insight into a company’s prospects and financial condition.
- Forms 4 make this information readily available at no cost for all types of investors via the SEC’s EDGAR database.
U.S. Securities and Exchange Commission. “Insider Transactions and Forms 3, 4, and 5,” Page 1.
U.S. Securities and Exchange Commission. “Insider Trading Policy.”
U.S. Securities and Exchange Commission. “Important Information About EDGAR.”
Putnam Investments. “When To Pay Attention to Insider Buying.”
James Scott and Peter Xu. “Some Insider Sales Are Positive Signals.” Financial Analysts Journal.