Form 4: when insiders trade their own company's stock
The people who run a company know it better than anyone. When they trade its shares, they have to say so, fast. This lesson shows you how to read those reports and how much weight to give them.
Who counts as an insider
For these reports, an insider is one of three kinds of people:
- A director, meaning a member of the company’s board.
- An officer, meaning a top executive such as the CEO, the chief financial officer or the head of a major division.
- Anyone who owns more than 10% of the company’s shares.
Insiders file three related forms. Form 3 is filed within 10 days of becoming an insider and lists what they already own. Form 4 reports each change after that. Form 5 is a yearly catch-all for a few kinds of trades that can be reported late.
Insiders are allowed to trade their own company’s shares. What they may not do is trade on material nonpublic information, meaning important news the public doesn’t have yet. That is illegal insider trading. Many companies also only let insiders trade during set windows, often in the weeks after a quarterly report comes out.
There is one more rule worth knowing. If an insider buys and sells (or sells and buys) within less than six months and makes a profit, they generally must hand that profit back to the company. This discourages quick in-and-out trading.
What a Form 4 shows
A Form 4 is due within two business days of the trade. It is short, and most of it fits in two tables. Table I covers shares. Table II covers derivatives, which here mostly means stock options. Each row tells you:
- Who traded, and their role (director, officer, 10% owner).
- When the trade happened.
- What kind of trade it was, shown as a one-letter code.
- How many shares, and at what price.
- How many shares the insider holds afterward.
- Whether they own the shares directly or indirectly, for example through a family trust.
The codes you will see most often:
| Code | Meaning |
|---|---|
| P | A purchase with the insider’s own money, in the market or a private deal |
| S | A sale, in the market or a private deal |
| A | Shares or options granted by the company, usually as pay |
| M | Stock options exercised, turned into shares |
| F | Shares handed back to the company to cover taxes or the cost of exercising options |
| G | A gift, such as to a charity or family member |
Only P and S are true open choices to put money in or take money out. A, M and F are mostly paperwork from how executives are paid.
Why purchases usually say more than sales
Insiders sell for all kinds of reasons. Much of their wealth is often tied up in one company’s stock, so they sell to spread it out. They sell to pay taxes on stock they were given, to buy a house, to pay for college. A sale tells you the insider wanted cash, and that is about all it reliably tells you.
Purchases are different. Executives already get plenty of company stock as pay. When one reaches into their own bank account to buy more, there is usually one main reason: they think the shares are worth more than the price. That is why people tend to read purchases as more informative than sales.
A few details make a purchase stand out more:
- Size. A purchase that is large compared with the insider’s salary or existing stake.
- Several insiders. Three directors buying in the same month says more than one.
- Role. The CEO and chief financial officer see the numbers first.
Planned selling programs
Insiders often know important news before the public, which makes the timing of any sale awkward. The SEC’s answer is Rule 10b5-1. It lets an insider set up a written trading plan at a time when they hold no secret news. The plan fixes in advance how many shares to sell and when, or by what formula. After that, sales happen on schedule, without the insider choosing the moment.
Rules updated in 2022 added a waiting period: for directors and officers, generally at least 90 days between setting up a plan and the first trade. Since 2023, the Form 4 has a checkbox showing whether a trade was made under such a plan.
A planned sale says even less than an ordinary one. The decision may have been made months earlier, for personal reasons.
Two filings arrive for Maple Bikes Inc. in the same week. Both trades happen at $50 a share.
Filing 1: the chief financial officer. She held 30,000 shares and options to buy 10,000 more at $20 each. In one day her Form 4 shows:
| Code | What happened | Shares held after |
|---|---|---|
| M | Exercised 10,000 options at $20 | 40,000 |
| F | Handed back 4,000 shares to cover the cost | 36,000 |
| S | Sold 6,000 shares at $50, plan box checked | 30,000 |
The cost of exercising was 10,000 × $20 = $200,000. Paying it with shares worth $50 took $200,000 ÷ $50 = 4,000 shares. She then sold 6,000 × $50 = $300,000 of stock under her planned program. She ends with 30,000 shares, exactly where she started. This is routine: she turned part of her pay into cash.
Filing 2: a director. His Form 4 shows code P: he bought 4,000 shares at $50, which is 4,000 × $50 = $200,000 of his own money. He held 20,000 shares before, so his stake grew by 4,000 ÷ 20,000 = 20%.
The sale looks bigger in dollars. The purchase tells you more.
A clue, not a signal
Insider buying is one piece of evidence, not a verdict. Insiders can be wrong. They can be too hopeful about their own company. They may buy to show confidence in public. And they know nothing about what other investors will pay next month.
Use insider activity as a reason to look closer. If directors are buying, open the latest 10-Q and see whether the numbers back up their confidence. If many insiders are selling outside their planned programs at once, check the recent 8-Ks and risk factors. The filings tell you what is happening; the trades tell you what the insiders seem to think about it.
- Insider
- A director, a top officer or an owner of more than 10% of a company’s shares.
- Form 4
- The report an insider files within two business days of trading the company’s shares.
- Material nonpublic information
- Important news about a company that the public doesn’t know yet.
- Stock option
- The right to buy a share later at a fixed price.
- Exercise
- Using an option to actually buy the shares at the fixed price.
- Rule 10b5-1 plan
- A trading plan set up in advance so sales or purchases happen on a fixed schedule.
Where to see it on Filing.fyi
Pick a company from the ticker list and open its filings page (the address ends in /filings). The insider transactions section lists its Form 4 filings, and the ownership section lists 13D and 13G filings from investors who hold more than 5%. To see how much stock the same leaders already own and how they are paid, read the proxy statement lesson.
- Directors, top officers and 10% owners must report trades within two business days on Form 4.
- Codes P and S are real choices; A, M and F are mostly pay paperwork.
- Purchases with personal money usually say more than sales, which have many ordinary reasons.
- Sales under a Rule 10b5-1 plan were scheduled in advance and say even less.
- Insider activity is a reason to look closer, not a reason to act.
This lesson is education, not investment advice. Examples use made-up companies and round numbers unless a real filing is named.