Insider Trading and How to Read SEC Forms 3,4,5

April 8th, 2009 | Comments (6)

Insider trading is a term that most of us have heard and we usually associate insider trading with the illegal act of executive insiders trading securities based on significant non public information or manipulating information in order to profit from the market. In order to prevent such acts, insider trading laws and rules were created by the SEC. We’ll be taking a look at the different forms required to be submitted in order to prevent insider stock trading.

Definition of SEC Form 3, 4, 5

The SEC requires all corporate insiders and any owner of 10% or more of a company’s stocks to be registered and file Forms 3, 4 and 5. There are sites that automatically track insider trades such as Inside Monitor but the best way, as always, is to get the information directly from the source, i.e. the SEC website.

The initial filing is on Form 3. An insider of an issuer that is registering equity securities for the first time under Section 12 of the Exchange Act must file this Form no later than the effective date of the registration statement. If the issuer is already registered under Section 12, the insider must file a Form 3 within ten days of becoming an officer, director, or beneficial owner.

Changes in ownership are reported on Form 4 and must be reported to the SEC within two business days. You can find the limited categories of transactions not subject to the two-day reporting requirement in the new rule.

Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. If a Form must be filed, it is due 45 days after the end of the company’s fiscal year.  — SEC

How to Read the SEC Form 4

Assuming you know how to get to the SEC Edgar page and enter the company ticker, a list of filed submissions is displayed.

sec01

I am using (ValueVision) VVTV as an example of insider trading because of the recent heavy, albeit good, activity. Click on the HTML format for the form you wish to view and select the HTML format again on the next page to bring up the following Form 4.

sec02

There are a lot of boxes but I’ve circled what I feel to be the important parts. Form 4 shows the reader which insider is trading, whether their trade was a buy or sell and whether it was an option or open market purchase. Insider buying on the open market is a very good sign that the insiders believe the company is trading at a cheap price compared to its prospects.

From the latest Form 4 filed by Keith Stewart of VVTV, we can see that he made an open market purchase of 50,000 shares at a price of $0.66. He now holds over 860,000 directly. A good tip is to grab the RSS of the companies you follow and add it to your reader to receive the notification as soon as it happens.

Good Insider Trading

The truth is that insiders are just like you and me. We sell our stocks for many reasons but buy for only one. Insiders are the same. They may need the money for a downpayment on their private jet or vacation homes but they buy for one reason and one reason only. The shares of their company is cheap. If we look at VVTV again, their recent insider trading activity has been heavy. The CEO of VVTV has been snapping up shares in the 60c range. This also helps to build investor confidence that insiders are putting their money where their mouth is.

The insider trading rules to submit Forms 3,4,5 not only helps illegal insider trading, but also offers a glimpse of how management think of their company.

Diclosure

I hold VVTV at time of writing

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • http://can-turtles-fly.blogspot.com/ Sivaram Velauthapillai

    Good article… thanks

    Sivaram Velauthapillai’s last blog post..Why do regulators, government officials, and central bankers pursue the megabank strategy?

  • http://stockmanmarc.blogspot.com stockmanmarc

    Good Article Jae!

    stockmanmarc’s last blog post..Ignore The Headlines And Concentrate On Value Part II

  • Maxi

    Hi,
    Do you know why sometimes insiders buy shares on one day just to sell them at the next day or so?
    For example, CARTER WILLIAM, CEO of Hemispherx Biopharma Inc. (HEB) bought 820,826 shares on 2010-08-10 and sold 377,388 shares on 2010-08-11.

  • http://www.oldschoolvalue.com Jae Jun

    I have absolutely no idea. The officers may be day traders :)

  • Gregory P

    This article does not give anywhere enough information to help read the forms. This needs to be expanded to include all the variations of the variables in order to be useful. There are many more variations of this form that mostly confuse and are difficult to understand. The simple case of buying a direct ownership in the company is the easiest to understand and the least variation needing explanation.

    A description of the various transaction codes, the presentation of stock options and stock grants and indirect purchases, transfers, etc … are commonly seen in practice and require further explanation to the novice.

  • Gregory P

    With respect to Maxi’s question concerning HEB: The shares bought on that date are related to an stock grant, not an open market purchase as it seems, and then subsequent selling to cover the taxes on that grant.

    Normally, when I see stock grants, the price is set to $0 rather than the current stock price on the day, so I do not like the way this looks on the completed forms that HEB issued. (as the person really did not pay anything for it).

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