Insider Buying and Form 4 Filings
When a company's officers, directors or owners of more than 10% of its stock trade it, they report the trade to the SEC on Form 4, usually within two business days. Most of those filings are routine. Open-market purchases are the part research has found most informative.
The rule
Section 16(a) of the Securities Exchange Act covers a company's officers, its directors and anyone owning more than 10% of a class of its stock. SEC Rule 16a-3(g)(1) requires a Form 4 before the end of the second business day after the trade (SEC staff interpretations). A trade on Tuesday is due by the end of Thursday. For a trade made under a preset trading plan (a Rule 10b5-1 plan), where the insider did not pick the date, the clock can start when the broker reports the execution instead.
Reading the transaction codes
Each line of a Form 4 carries a code. The ones you will see most:
- P: an open-market or private purchase. The insider spent their own money on the stock.
- S: an open-market or private sale.
- A: a grant or award from the company, part of pay.
- M: an option exercise or conversion.
- F: shares withheld to pay an exercise price or tax.
Only P is a purchase the insider chose to make. Grants, exercises and tax withholding happen on a schedule set by the pay plan, and sales have many reasons unrelated to the outlook: taxes, diversification, a house.
What research has found
Lakonishok and Lee studied insider trades at NYSE, AMEX and Nasdaq companies from 1975 to 1995 (Are Insider Trades Informative?, Review of Financial Studies, 2001). They found the predictive value in purchases, concentrated in smaller companies, and little in sales.
Cohen, Malloy and Pomorski split insiders into routine traders, who traded in the same calendar month in each of several consecutive years, and opportunistic ones, who did not (Decoding Inside Information, Journal of Finance, 2012). Trades by the opportunistic group carried the signal; the routine trades showed essentially none. Both studies describe past data, and neither is a promise about the next filing.
Using it
Start with code P purchases, look at the size against the insider's existing holding and pay, and give more weight to several insiders buying around the same time. Our Smart Money page (Premium) lists recent open-market insider purchases alongside congressional trades.
Frequently asked
How quickly must insiders report a trade?
Under SEC Rule 16a-3(g)(1), Form 4 is due before the end of the second business day after the trade. Trades made under a preset 10b5-1 plan can count from the day the broker reports the execution.
Which Form 4 transactions matter most?
Open-market purchases, code P. Grants (A), option exercises (M) and tax withholding (F) follow the company's pay schedule, and sales (S) have many reasons unrelated to the outlook.
Does insider buying predict returns?
Academic studies have found that insider purchases carried more predictive value than sales, especially at smaller companies and for insiders who do not trade on a fixed yearly pattern. That describes past data, not a guarantee.