Insider Trading And How To Read SEC Forms 3,4,5

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.

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.

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.

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 make open market purchase fo 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.

Disclosure: I hold VVTV at time of writing

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