Statement of Changes in Beneficial Ownership
At StockTrot, we spend a great deal of time thinking about what corporate insiders are doing and why they are doing it. The Form 4 is our glimpse into their minds. Money speaks volumes and the Form 4 shows us exactly what they are doing with their money, whether they are investing back into their company or selling off their shares. We look at these patterns of buying and selling to assess the executive's confidence in their stock or lack thereof. Studies have continued to show that insiders tend to beat the market when trading their own stocks. To understand why we value the Form 4 so highly, you must first understand, what exactly is a Form 4 and who files them?
What is a Form 4
The Form 4 is used for insiders to disclose any change in ownership to the SEC. Insiders must file within two days of the transaction.
Who is an insider
Insiders are defined by SEC. They are directors, officers, or anyone that is directly or indirectly the beneficial owner of more than 10% equity of a registered public company. Securities are reported as owned directly when they are held in the reporting person's name, or name of the bank or broker.
Isn't insider trading illegal?
You probably know insider trading as the type of trading that put Martha Stewart behind bars or the focus of the HBO show Billions. This type of trading is illegal. Anytime anyone trades a security using material nonpublic information, it is deemed illegal. The type of trading that StockTrot is covering is legal. Persons described as 'insiders' by the SEC can legally buy and sell their own stock. That being said, if those insiders base their trade off of material nonpublic information, that is illegal. How would it be possible for an insider to not use the information that only they as directors of the company know? How could they block out that information and make trades that do not use any of that info? The answer is that they most likely make a certain number of trades using this information and because of this tend to beat the market. However, it is very difficult to prove that the insider in fact did base his or her trades off of any nonpublic information and therefore is seldomly prosecuted.