Understanding Insider Trading: What Form 4 Filings Tell You
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When corporate executives buy or sell shares of their own company, they must report it to the SEC via Form 4. These filings are public and can provide valuable signals about management confidence.
What Is Form 4?
SEC Form 4 is a disclosure filed within two business days of an insider transaction. "Insiders" include officers (CEO, CFO, etc.), directors, and anyone owning more than 10% of a company's shares.
Transaction Types
Open market purchases (P): The strongest signal. When an insider buys shares on the open market with their own money, it suggests they believe the stock is undervalued.
Sales (S): More ambiguous. Insiders sell for many reasons — diversification, taxes, personal expenses. A single sale isn't necessarily bearish.
Option exercises (M): Executives exercising stock options. Often routine and less informative than open market activity.
Awards (A): Shares granted as compensation. Not a trading signal.
What Signals to Watch
- Cluster buying: Multiple insiders buying within a short period is a strong bullish signal
- CEO/CFO purchases: The most informed buyers in the company
- Large purchases: Transactions over $1M show high conviction
- Unusual timing: Buying before earnings or after a stock drop
Common Misconceptions
Not all insider selling is bearish. Many executives sell on predetermined schedules (10b5-1 plans). Look for unusual, discretionary sales outside of regular patterns.
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