Lesson 7 of 8
Reading insider trades
An insider's Form 4 shows what they did with their own money. A sale scheduled months ago says far less than a purchase made today.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- An insider's Form 4 reports a trade in their own company's stock, filed within two business days of the trade.
- Insiders sell for many reasons unrelated to the stock's value, but they usually buy for one: they think it is worth more.
- A sale under a 10b5-1 plan was decided months earlier and says little about today; an open-market purchase was decided today.
A company's officers and directors trade its stock on the public record. What they did with their own money is a fact you can read; what it means depends on whether the trade was scheduled in advance or made today.
Six months, one plan, two trades
- JanPlan adoptedA director adopts a pre-arranged plan setting future sale dates and sizes months in advance; the company discloses it in its next 10-Q.
- AprScheduled sale executes500 shares sell automatically, on the date and at the size set back in January.
- JunOpen-market purchaseTwo other directors buy shares with their own cash, unscheduled, reported on Form 4 within two business days.
What a Form 4 actually is
Section 16(a) of the Securities Exchange Act requires officers, directors and owners of more than 10 percent of a company's shares to report their trades. Form 3 covers the first time they take the position, and Form 4 covers each change, filed within two business days of the trade. Form 5 covers a small set of transactions exempted from that faster deadline. The filing states the trade date, the number of shares, the price, and a transaction code for what kind of trade it was.
| Code | Means |
|---|---|
| P | Open-market purchase |
| S | Open-market sale |
| A | Grant or award |
| M | Option exercise |
| F | Shares withheld for tax |
Only P is a decision to spend their own cash. A checkbox marking the trade as made under a 10b5-1 plan has existed only since April 2023; older filings mention a plan in a footnote, if at all.
Sales and purchases are not symmetric evidence
Peter Lynch put it plainly in One Up on Wall Street: insiders sell for many reasons, but they buy for one. An insider sells for reasons that have nothing to do with a view on the stock: a house purchase, a tax bill, diversification away from a concentration in one company's shares, an option about to expire. An insider buys, with money already taxed and already available for anything else, for a much narrower set of reasons, and the plainest one is that they think the shares are worth more than the price. Lynch made one exception: many officers selling most of their shares after a large rise is itself worth noticing. A single sale is weak evidence of anything. A purchase, especially by more than one insider in the same window, is a stronger signal, though never proof.
Why a scheduled sale says less
SEC Rule 10b5-1 lets an insider adopt a written trading plan, set at a time they hold no material nonpublic information, that schedules future trades in advance. The plan gives the insider an affirmative defense against a claim of trading on inside information, because the decision was made before the information that might later exist. The 2022 amendments added cooling-off periods between when a plan is adopted and when its first trade can execute. A sale under such a plan reflects a decision made when the plan was signed, not a view of the stock on the day it executes. That is why the plan flag on a Form 4 changes what the filing is evidence of. When a plan was adopted or changed can itself carry information, which is exactly the abuse the 2022 cooling-off periods target.
The pattern that has been studied
Tweedy, Browne's What Has Worked in Investing summarises five studies, from 1958 to 1976, of stocks bought after more than one insider bought and purchases clearly outnumbered sales. In each, those stocks returned more than the market index. Tweedy, Browne add, from their own experience, that such buying often appears in companies priced low against earnings or book value. These are old studies of groups of companies, not a rule for reading any single filing.
Check yourself
How quickly must an insider file a Form 4 after a trade?
- Within two business days
- Within 30 days
- By the next annual proxy
Show the answer
Answer: A.
Section 16(a) requires a Form 4 within two business days of the trade, which is why insider trading data is close to current.Why does an insider's purchase generally carry more signal than a sale?
- Sales are not required to be disclosed
- Sales have many motives; purchases usually have one
- Purchases are reported faster than sales
Show the answer
Answer: B.
Insiders sell for taxes, diversification and other personal reasons that say nothing about the stock. A purchase, made with cash already available for anything else, more often reflects a view on value.A director's shares sell automatically under a 10b5-1 plan adopted eight months earlier. What does the sale mainly reflect?
- The director's view of the stock on the day it sold
- Material nonpublic information at the time of the trade
- A decision made when the plan was adopted, months before the sale
Show the answer
Answer: C.
A 10b5-1 plan is set up in advance precisely so the trade reflects an earlier decision, not information or a view held on the day it executes.Sources
- Section 16(a) of the Securities Exchange Act: Forms 3, 4 and 5, and the two-business-day filing deadline for a Form 4.
- SEC Rule 10b5-1: pre-arranged trading plans, with cooling-off periods added by the 2022 amendments.
- Lynch with Rothchild, One Up on Wall Street, 1989 (millennium edition 2000), chapter 8, on insider buying and selling.
- Tweedy, Browne, What Has Worked in Investing, 1992, revised 2009, on studies of insider accumulation (Table 30) and the firm's observation that it clusters in low-priced stocks.
What this leaves out
- The timeline and the worked example use round invented numbers and dates so the pattern can be checked by hand.
- A Form 4 does not state the insider's reason for a trade, plan or no plan, and any reading of intent from it is an inference, not a disclosed fact.
- The studies cited describe patterns across many companies and years, not a rule for reading any single filing.
- The insider studies cited cover 1958 to 1976; later markets may differ.
- Nothing here is advice about any security.