Insider buying and selling: when it means something

Who has to report, and how fast

Officers, directors and holders of more than 10% of a company’s shares are corporate insiders under US securities law. They report most purchases and sales on Form 4, which must be filed with the SEC within two business days of the trade. The filings are public and free to read on the SEC’s EDGAR database.

Why most sales are weak signals

Insiders sell for many reasons that have nothing to do with the company’s outlook: paying taxes on vested shares, diversifying, buying a house. Many sales are also made under Rule 10b5-1 plans, which are set up in advance and run on a schedule.

A large sale under a pre-arranged plan therefore says much less than its dollar size suggests. The filing usually indicates whether a plan was used.

Why buys get more attention

There is usually one main reason to buy shares with your own money on the open market: you expect them to be worth more. Purchases by several insiders around the same time, especially after a price drop, are the filings analysts tend to watch most.

How to read a filing

• Transaction code: an open-market purchase is different from an option exercise or a gift.
• Size relative to holdings: selling 2% of a stake is not the same as selling 80%.
• Plan or not: check whether the trade was made under a 10b5-1 plan.
• Clusters: several insiders buying in the same weeks says more than one.
• Big holders’ quarterly reports (13F) are a different filing. They arrive up to 45 days after the quarter ends, so they can be out of date when published.