What is SEC Form 4 and how do you read Form 4 filings?

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Form 4 is a US Securities and Exchange Commission (SEC) filing that relates to insider transactions. Officially known as Form 4: Statement of Changes in Beneficial Ownership, it needs to be completed and filed with the SEC whenever a company ‘insider’ in the US buys or sells shares in their own company.

In this guide, we look at the basics of SEC Form 4 including how to read Form 4 filings. We also explain how Form 4 filings can be used to generate investment ideas.

What is SEC Form 4?

Form 4: Statement of Changes in Beneficial Ownership is a two-page document in which insiders must list any recent purchases or sales of company stock they have made, as well as the exercise of any company options. The form requires insiders to list the details of any such transactions, their holding in the company after the transactions, and their relationship to the company.

Who is required to file Form 4?

Insiders consist of officers and directors of a company, as well as any shareholders that own 10% or more of a company's outstanding stock.

When does a Form 4 need to be filed?

Form 4 is required to be filed before the end of the second business day following the day on which a transaction resulting in a change in beneficial ownership has been executed.

How can investors use Form 4 filings to their advantage?

Form 4 filings can help investors identify transactions that top corporate insiders such as CEOs, CFOs, and Chairmen have made in US publicly-listed companies. This is valuable because corporate insiders have a genuine information advantage over other investors and a number of academic studies have found a link between insider transaction activity and future stock returns. As such, Form 4 filings can potentially be used to generate investment ideas.

As a general rule, Form 4 filings that show substantial insider buying activity are a bullish signal. If insiders are buying, it shows that they are confident about the future and expect the company’s share price to rise.

Form 4 filings that show that insiders have been selling stock are a little more difficult to interpret. This is because there are a number of reasons that insiders sell stock that have nothing to do with the company’s future prospects. For example, an insider may simply wish to diversify their investments. Form 4 filings that show large insider sales should not be ignored, however, as in some situations, it can be an indication that insiders are offloading their stock in the expectation that the stock will soon fall.

Where can investors find Form 4 filings?

There are a number of ways that you can gain access to Form 4 filings. The first way is to go directly to the SEC’s EDGAR database. Here, you can search information collected by the SEC using a variety of search tools. The second way is to access websites that offer Form 4 information. The third, and easiest way, to track Form 4 filings is to subscribe to an insider transaction data provider such as 2iQ Research.

How to read a Form 4 filing

SEC Form 4 filings are easy to read and interpret. Below is an example of a completed Form 4 document and a breakdown of this filing.

  • Section 1 contains the details of the insider that made the transaction. In this case, it was Elon Musk.
  • Section 2 contains the name of the security – Tesla Inc.
  • Section 3 contains the date of the earliest transaction – 14 February 2020.
  • Section 5 contains the details of the relationship of the reporting person to the company. From the boxes ticked, we can see that the insider was a Director, Officer (CEO), and 10% Owner.
  • Table 1 contains the details of the trade. In this case, we can see that Musk purchased (P) 13,037 Tesla shares at a price of $767 per share. Following the transaction, he owned 34,098,597 Tesla shares.
  • There is also a comment in the Explanation of Responses section that provides more information. This tells us that Musk purchased the stock through the Elon Musk Revocable Trust, which he is a trustee of.

What are the Form 4 transaction codes?

Form 4 transaction codes are listed below:

General Transaction Codes
P – Open market or private purchase of securities
S – Open market or private sale of securities
V – Transaction voluntarily reported earlier than required

Rule 16b-3 Transaction Codes
A – Grant, award, or other acquisition
D – Sale (or disposition) back to the issuer of the securities
F – Payment of exercise price or tax liability by delivering or withholding securities
I – Discretionary transaction, which is an order to the broker to execute the transaction at the best possible price
M – Exercise of conversion of derivative security

Derivative Securities Codes
C – Conversion of derivative security
E – Expiration of short derivative position
H – Expiration (or cancellation) of long derivative position with value received
O – Exercise of out-of-the-money derivative securities
X – Exercise of in-the-money or at-the-money derivatives securities

Other Sections 16(b) Exempt Transactions and Small Acquisition Codes
G – Bona fide gift
L – Small Acquisition
W – Acquisition or disposition by will or laws of descent and distribution
Z – Deposit into or withdrawal from voting trust

Other Transaction Codes
J – Other acquisition or disposition (transaction described in footnotes)
K – Transaction in equity swap or similar instrument
U – Disposition due to a tender of shares in a change of control transaction

Form 4: summary

SEC Form 4: Statement of Changes in Beneficial Ownership is a document that is required to be completed and filed with the SEC whenever a company insider in the US buys or sells shares in their own company.

Insiders consist of officers and directors of a company, as well as any shareholders that own 10% or more of a company's outstanding stock.

Form 4 filings can potentially provide investors with trading signals. Insiders have an information advantage over other investors and studies show a link between their trades and stock performance. A Form 4 filing that shows a significant purchase or sale can be a good starting point to further investigate a stock.

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