An insider trade is a legal purchase or sale of a company’s stock by its officers, directors or anyone who owns more than 10% of the shares. These insiders must report most trades to the SEC on Form 4, usually within two business days. The filing shows who traded, how many shares, the price and a code for the type of trade.
- Legal insider trades are public. They are reported on SEC Form 4.
- Most Form 4s are due within two business days of the trade.
- Code P is an open-market purchase. Code S is a sale.
- Many sales are planned in advance under Rule 10b5-1 plans or cover taxes on stock pay.
- An insider trade is one piece of information, not a signal on its own.
What is an insider trade?
In daily market news, “insider trade” usually means a legal, reported trade by a company insider. Under Section 16 of the Securities Exchange Act, officers, directors and owners of more than 10% of a company’s stock must disclose their trades in that company’s shares.
This is different from illegal insider trading, which means trading on important information the public does not have yet. Reported Form 4 trades are the legal, public kind.
What are Forms 3, 4 and 5?
| Form | What it reports | When it is due |
|---|---|---|
| Form 3 | An insider’s first holdings | Within 10 days of becoming an insider |
| Form 4 | Changes in holdings, such as buys and sells | Within 2 business days |
| Form 5 | Certain trades not reported earlier | Within 45 days after the company’s fiscal year ends |
What do the Form 4 transaction codes mean?
Each line on a Form 4 has a letter code. The most common are:
- P: open-market or private purchase.
- S: open-market or private sale.
- A: a grant or award from the company, such as stock pay.
- M: exercise or conversion of an option.
- F: shares withheld to pay the exercise price or taxes.
- G: a gift.
Only P and S are trades the insider chose to make in the market. Grants, option exercises and tax withholding are often routine parts of how executives are paid.
Why do insiders buy and sell?
Insiders sell for many personal reasons: paying taxes on stock pay, buying a home, or spreading out their savings. Many sales follow a Rule 10b5-1 plan, a schedule set up in advance. Because of this, one sale usually says little about the company.
Open-market purchases are less common, because insiders already get stock as pay. That is why many investors pay extra attention when several insiders buy with their own money. Even so, insiders can be wrong, and a trade is just one fact to weigh alongside the company’s results and filings.
How do I read one insider trade?
Here is a hypothetical example. A row reads: Director, code P, 5,000 shares at $20.00. That means a director bought 5,000 shares in the market at $20 each, about $100,000. The filing also shows how many shares they own after the trade, which helps you see whether the purchase is large or small for that person.
Where can I see insider trades?
Every Form 4 is free on SEC EDGAR. Trade Conquest’s Insider Trades page lists the latest filings in one place, with buys marked in green and sells in red, plus recent trades reported by members of Congress.
Frequently asked questions
Is insider trading legal?
Yes, when insiders trade on public information and report it. Officers, directors and 10% owners report their trades on SEC Form 4. Trading on important non-public information is illegal.
How fast are insider trades reported?
Most trades must be reported on Form 4 within two business days after the trade.
What does code P mean on a Form 4?
Code P means an open-market or private purchase. Code S means a sale. Other codes cover grants, option exercises, tax withholding and gifts.
Should I buy a stock because an insider bought it?
An insider purchase is one piece of information, not advice. Insiders can be wrong, so look at the company's results, filings and news as well.
More guides
Keep learning with these related guides, or see every guide and tool on the Learn page.
Sources
- SEC: Forms 3, 4 and 5 (Investor Bulletin)
- Investor.gov (SEC): Insider Trading
- SEC EDGAR full-text search
Not financial advice. This article is for educational purposes only and is not financial, investment, legal or tax advice. It is published by Trade Conquest, owned and operated by Nite Cat, LLC, 2885 Sanford Ave SW #35064, Grandville, MI 49418. Rules change; check the cited official sources for the latest version. Investing carries a risk of loss. Trade Conquest does not recommend buying or selling any security.