How to Read SEC Form 4 Filings Like a Pro

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SEC Form 4 is a critical disclosure that insiders – corporate officers, directors or major (10%+) shareholders – must file whenever they buy or sell their company's stock¹. These filings are public on the SEC's EDGAR system.

They provide a window into management's trades, offering clues about how insiders view the company's prospects. (Importantly, Form 4 is just a disclosure: an insider trade is not illegal simply by being reported.)

Savvy investors use Form 4s to spot significant insider activity². In this guide we'll dissect a Form 4 line by line – from the header info to the transaction tables – and highlight the buying/selling signals that matter most.

Anatomy of Form 4: Section by Section

Header Section: The Who and When

The top of Form 4 identifies who made the trade, what their role is, and when the trade occurred and was reported³. Key fields include:

• Name & Title: The reporting person's full name and official position (e.g. "Jane Doe, CFO"). This tells you which insider is trading.
• Issuer: The company name and ticker symbol for the stock in question.
• Relationship: The insider's role (e.g. Officer, Director, or ≥10% owner), usually indicated by checkboxes. This confirms they fall under SEC Section 16 reporting rules.
• Address: The insider's business address (sometimes the company's address).
• Transaction Date: The date the trade actually occurred.
• Filing Date: When the Form 4 was filed with the SEC. By rule it must be filed within two business days after the transaction⁴.
• Late Filing Indicator: If the form is filed after the deadline, it is marked as tardy – a red flag to analysts (and potentially the SEC).

Knowing these header details lets you match a Form 4 to a specific insider and trade. For example, one Form 4 may list "David B. Fischer – Facebook, Inc. (FB) – May 29, 2020" at the top. This tells you the trade was by Facebook's chief revenue officer on that date.

Paying attention to the filing date vs. transaction date (and any "late" indicator) is important, since SEC rules require prompt reporting.

Table I: Non-Derivative Security Transactions

The main body of Form 4 is one or more tables listing each trade in plain equity (common stock, preferred stock, etc.)⁵. Each row represents a transaction in "non-derivative" securities. Key columns are:

• Title of Security – e.g. "Common Stock" or "Class A Common Stock".
• Transaction Date – date of the trade (should match the header's date).
• Transaction Code – a letter indicating the type of transaction⁶. Common codes include P (purchase on open market), S (sale on open market), M (exercise of options or conversion of derivatives), A (award of new shares, e.g. RSUs), G (gift), etc.
• Amount Acquired (A) or Disposed (D) – number of shares bought (A) or sold (D) in this transaction.
• Price – price per share of the transaction (if applicable). For purchases or sales this is the trade price. (If the transaction is not a market trade – e.g. a gift or option exercise – this column may show "0" or the grant price.)
• Shares Owned After – total shares the insider owns after the trade. Comparing this to prior holdings (if known) tells you the net change.
• Ownership Form – "D" (Direct) or "I" (Indirect), indicating whether the shares are owned personally or through an entity.
• Remarks/Footnotes – At the bottom of Form 4 is an "Explanation of Responses" section. This is where insiders explain anything not obvious – for example, multiple trades at different prices will be footnoted.

Table II: Derivative Security Transactions

If the insider transacted in options, warrants or other derivative securities, Form 4 includes a second table (Table II)⁷. This table has columns such as:

• Derivative Security – e.g. "Option" or "Warrant".
• Conversion/Exercise Price – the strike price for an option or conversion price for a derivative.
• Transaction Date – date of the option exercise or derivative conversion.
• Transaction Code – again, P, S, M, etc. (For example, M indicates an exercise of a derivative, like options.)
• Number of Derivative Securities A/D – how many options or warrants were exercised (A) or disposed (D).
• Date Exercisable/Expiration – the date the options became exercisable (or expired).
• Underlying Securities – Title and number of actual shares underlying the derivative (for an option exercise, this is the number of shares acquired through exercising).
• Price of Derivative Security – usually the exercise price paid.
• Number of Derivatives Owned After – how many derivative contracts remain.
• Ownership Form (D/I) and Nature of Indirect Ownership – similar to Table I.

For example, in Silicon Valley Bank CEO Gregory Becker's Form 4, Table II records that he exercised 12,451 stock options at $105.00 each (code M), immediately acquiring 12,451 common shares (the underlying) on Feb 27, 2023.

At the same time, Table I shows a sale of those 12,451 shares (code S) at about $285 each, for a $3.6M proceeds. The form reports both legs so you can piece together the full transaction.

Footnotes and Additional Details

At the bottom of Form 4 is a section for explanations or footnotes⁸. Insiders must use this space to clarify any unusual aspects. For instance, if a stock sale was executed in several trades at different prices, the footnote will often describe the range or average price.

Check these remarks for things like Rule 10b5-1 trading plan disclosures or backdating explanations. In general, each transaction or class of shares must be reported on its own line, and the form must be manually signed by the insider.

Decoding Insider Transactions: What to Watch For

Once you've identified the trades on a Form 4, the next step is interpreting what they might mean⁹. Here are some guidelines and examples:

Who's Trading Matters: Pay attention to who is buying or selling. A CEO or CFO trade often gets more scrutiny, but mid-level insiders close to daily operations (like business-unit heads) can also signal important info. Multiple insiders trading in the same direction (clustered trades) may indicate a coordinated view of the company's prospects.

Buying vs. Selling: Insider purchases (codes P or A) are generally seen as bullish: insiders might be buying because they think the stock is undervalued¹⁰. For example, Elon Musk's Feb 2020 Form 4 shows he purchased 13,037 Tesla shares at $767 each – a clear bullish vote on Tesla at the time.

By contrast, insider sales (code S) are common and don't always imply negative news. Executives sell for many personal reasons (taxes, diversification, big life events, etc.). A single sale by itself is not necessarily bearish¹¹.

Purchase Type – Open Market vs. Compensation: How an insider acquired shares can be telling. An open-market purchase (code P) at market price shows confidence¹². In contrast, buying shares through exercising options (code M) or as part of compensation (code A for award) is less informative, since the exercise terms were set earlier.

For example, if an insider simply exercises stock options they were granted, they might sell immediately or hold them – this is routine and not an extra bullish signal. But if that insider then turns around and buys additional shares on the open market, that extra purchase is a stronger sign of faith in the stock.

Trade Size and Stake: Consider the trade's size relative to the insider's total holdings¹³. A $10,000 purchase could be nothing for a billionaire but significant for a junior manager. Form 4 lets you calculate the insider's position before and after the trade (from the "Owned After" column).

For instance, if a director sells 50,000 shares but still holds 5 million, that's a tiny fraction of their stake. Conversely, a CEO selling 10% of his shares is huge.

Timing: When the trade occurs relative to company events matters¹⁴. Insider buys made well before good news (earnings beats, new product announcements, etc.) can signal that insiders knew something positive was coming. Conversely, selling right before a bad earnings report can look suspicious (though it may have benign explanations).

If a stock has already jumped and then insiders buy, the "signal" may be stale.

Rule 10b5-1 Plans: Many insiders trade under pre-arranged 10b5-1 plans to avoid legal issues¹⁵. Form 4 footnotes will often mention if a trade was pre-scheduled. Trades under these plans are usually less informative about current sentiment because they were planned months earlier. Recent SEC rules now require a 90-day waiting period after adopting a 10b5-1 plan before any trades can occur.

Unusual Codes: Besides P, S, M, G, A, there are special codes (like J) for other transactions¹⁶. These are relatively rare. Recent research has noted that unusual codes, especially if reported late, can be red flags. In practice, any unexpected code or missing explanation on Form 4 should prompt a deeper look.

Combine with Other Data: Finally, always consider Form 4 info alongside other data. Insider buys in a hot sector or around good earnings are more meaningful. Pair the filings with news, fundamentals, or technical signals.

Also remember there are related forms: Form 3 reports initial insider holdings, and Form 5 captures certain late or exempt transactions (filed after year-end)¹⁷. But for real-time signals, Form 4 is the go-to.

Key Takeaways

Reading a Form 4 involves carefully parsing the columns and codes to identify each insider trade. Watch who is trading, what type of transaction it is (purchase, sale, option exercise, etc.), and how large the trades are.

Always cross-check dates and footnotes for context. Over time, you'll learn to spot patterns: insider buying often signals confidence, while insider selling may be benign unless it's large or synchronized across multiple insiders.

By combining these filings with other research, you can use Form 4s as a powerful tool in your investment analysis toolkit.

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Disclaimer: This information is for educational purposes only and should not be considered investment advice. Past performance does not guarantee future results. Always consult with a qualified financial advisor before making investment decisions.

Sources

1. SEC Form 4: Statement of Changes in Beneficial Ownership Overview - Investopedia
2. Insider trading reports: How to read an SEC Form 4 filing - Journalist's Resource
3. Insider Transactions | SEC Forms 3, 4 & 5 Explained - Britannica Money
4. SEC Form 4 Explained for Beginners - eInvesting for Beginners
5. SEC FORM 4 Examples - SEC EDGAR Database
6. Insider Trading: Watch Your Form 4 Transaction Codes - The Corporate Counsel 7-17. Multiple references from the above sources provide comprehensive coverage of Form 4 analysis and interpretation guidelines.