Insider Action: What Is a Form 4?

Once designated as an "insider" at a publicly-traded company, the Securities Exchange Commission (SEC) becomes very interested in how you may be benefiting from the unfair advantage you have when trading your own company's shares.

Insiders must report trades of their companies' shares to the SEC via a template document called a Form 4 by the second business day following the trade. Since passage of the Sarbanes-Oxley Act in July 2002, the Form 4 is an electronic document that is filed on the SEC's EDGAR system.

A Form 4 lists the name of the insider, their relationship to the company, how many shares were traded, and at what price. It also gives the dates of an insider's trades, total holdings of the insider after the transactions, and if the trades were open market, related to the exercise of stock options, or some other special reason. Besides being quite detailed, a Form 4 is also timely.

Investors should keep in mind, however, that filling out a Form 4 is just annoying paperwork for insiders, most of whom are busy executives. It is typical that the burden is passed to an overloaded assistant or company lawyer to complete, and the forms are not likely their first priority either. This may explain why a small percentage Form 4s filed with the SEC are not filled out correctly, and require some interpretation. ...