Overview
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10% Beneficial Owner
A 10% beneficial owner is any person or entity that owns more than 10% of any class of a company's equity securities. They become "insiders" under Section 16 and must file Form 3, Form 4, and Form 5 reports, and are subject to short-swing profit rules.
Automatic Exercise
Automatic exercise occurs when stock options or similar derivative securities are automatically converted to shares at expiration without active intervention by the holder. On Form 4 filings, this is typically reported with transaction code J and represents administrative activity rather than an investment decision.
Beneficial Owner
A beneficial owner is a person who enjoys the benefits of ownership of securities even if the title is in another name. For SEC reporting purposes, this includes direct ownership, indirect ownership through trusts or partnerships, and ownership by family members.
Blackout Period
A blackout period is a restricted trading window when company insiders are prohibited from trading company stock, typically before earnings announcements or other material events, to prevent trading on material non-public information.
Cluster Buy
A cluster buy occurs when multiple insiders (officers or directors) purchase company stock within the same time period, typically within 30-90 days of each other. This pattern suggests coordinated confidence in the company's prospects.
Cooling-Off Period
A cooling-off period is a mandatory waiting period between adopting or modifying a 10b5-1 trading plan and executing the first trade under that plan. The SEC requires 90-day cooling-off periods for officers and directors.
Derivative Securities
Derivative securities are financial instruments whose value derives from an underlying security, such as stock options, warrants, or convertible securities. Insiders often receive derivative securities as compensation and must report transactions involving them.
Disgorgement
Disgorgement is the legal requirement to return illegally obtained profits from insider trading violations. The SEC can require insiders to disgorge profits made from illegal trades, plus interest.
Form 10-K
Form 10-K is the annual report that publicly traded companies must file with the SEC. It provides a comprehensive overview of the company's financial performance, business operations, risk factors, and management discussion.
Form 10-Q
Form 10-Q is the quarterly report that publicly traded companies must file with the SEC. It provides unaudited financial statements and updates on business operations for each of the first three quarters of the fiscal year.
Form 144
SEC Form 144 is a notice of proposed sale of restricted securities or securities held by affiliates. It must be filed when an insider intends to sell restricted stock or control securities, providing advance notice to the market.
Form 3
SEC Form 3 is the initial statement of beneficial ownership for insiders. It must be filed no later than 10 days after a person becomes an officer, director, or 10% shareholder, even if they don't yet own any stock.
Form 4
An SEC Form 4 is a mandatory filing that reports changes in ownership of company stock by "insiders"—officers, directors, and any shareholder owning more than 10% of the company. It must be filed within two business days of the transaction.
Form 5
SEC Form 5 is an "Annual Statement of Changes in Beneficial Ownership." It is used to report any transactions that were exempt from Form 4 reporting or should have been reported on Form 4 but weren't.
Form 8-K
SEC Form 8-K is a current report that companies must file to announce major events that shareholders should know about, including executive changes, acquisitions, earnings announcements, and other material corporate events.
Form DEF 14A
Form DEF 14A is the definitive proxy statement that companies file before annual shareholder meetings. It discloses executive compensation, board member information, and proposals to be voted on by shareholders.
Gift Transaction
A gift transaction occurs when an insider transfers shares to another party without receiving payment, typically for estate planning, charitable donations, or transfers to family members. Gift transactions are reported on Form 4 with transaction code G and do not indicate trading sentiment.
Informative Buy
An informative buy is an insider purchase that significantly increases the executive's total position in the company, typically by more than 10%. These purchases signal strong conviction because the insider is putting more of their own capital at risk.
Insider Ownership
Insider ownership represents the percentage of a company's outstanding shares held by officers, directors, and 10% beneficial owners. Higher insider ownership often indicates alignment between management and shareholders, while changes in ownership levels can signal insider sentiment.
Insider Sentiment
Insider sentiment measures the collective buying and selling behavior of company insiders to gauge their confidence in future stock performance. Bullish sentiment is indicated by net buying, while bearish sentiment shows net selling. Sentiment indicators aggregate Form 4 data into actionable signals.
Insider Trading
Insider trading refers to buying or selling a company's stock by individuals with access to material non-public information (MNPI). While illegal insider trading involves trading on MNPI, legal insider trading occurs when executives trade through proper channels and report via Form 4.
Insider Trading Window
An insider trading window is a period when company insiders are permitted to trade company stock, typically after earnings announcements and outside of blackout periods when they don't possess material non-public information.
Late Filing
A late filing occurs when an insider fails to submit Form 4 within the required two business days of a transaction. Late filings must be disclosed in the company's annual proxy statement (Form DEF 14A) and can indicate poor corporate governance or compliance issues.
Material Non-Public Information
Material Non-Public Information (MNPI) is information about a company that could affect its stock price and is not yet available to the general public. Trading on MNPI is illegal insider trading.
Open Market Purchase
An open market purchase occurs when an insider buys company stock on a public exchange (NYSE, NASDAQ, etc.) at the current market price, just like any other investor. This is transaction code "P" on Form 4 filings.
Pre-arranged Trading Plan
A pre-arranged trading plan, also known as a 10b5-1 plan, is a predetermined plan that allows insiders to trade company stock automatically according to preset criteria, providing an affirmative defense against insider trading accusations.
Restricted Stock Units
Restricted Stock Units (RSUs) are a form of equity compensation where employees receive units that convert to company stock after a vesting period. RSUs are reported on Form 4 when granted (Code A) and when they vest.
Rule 10b5-1
Rule 10b5-1 allows major holders of publicly traded corporations to set up a predetermined plan to sell company stocks in accordance with insider trading laws. It provides an affirmative defense against accusations of trading on non-public information.
Rule 144
Rule 144 under the Securities Act of 1933 provides a safe harbor for selling restricted securities and control securities. It establishes specific conditions including holding periods, volume limitations, and manner of sale requirements that must be met before these securities can be sold.
Schedule 13D
Schedule 13D is known as the "Beneficial Ownership Report." It must be filed when a person or group acquires more than 5% of any class of a company's equity securities with the intent to influence or change control.
Schedule 13G
Schedule 13G is a "Passive Investor" version of 13D. It is used by institutional investors (like Vanguard or BlackRock) who own more than 5% but do not intend to influence control of the company.
SEC EDGAR
SEC EDGAR (Electronic Data Gathering, Analysis, and Retrieval) is the official database where all SEC filings are submitted and made publicly available. It provides free access to Form 4 insider trading reports, 10-K annual reports, and all other required corporate filings.
Section 16
Section 16 of the Securities Exchange Act of 1934 governs insider reporting and trading. It requires officers, directors, and 10% beneficial owners to report their transactions and prohibits short-swing profits from round-trip trades within six months.
Section 16(c)
Section 16(c) of the Securities Exchange Act prohibits insiders from making short sales of company stock. This prevents insiders from profiting from stock price declines, complementing other Section 16 restrictions.
Short Sale
A short sale involves selling borrowed securities with the intention of buying them back at a lower price. Section 16(c) of the Securities Exchange Act prohibits company insiders from short selling their company's stock, ensuring they can only profit from price increases.
Short Swing Profit Rule
Section 16(b) of the Securities Exchange Act, or the "Short Swing Profit Rule," requires company insiders to return any profits made from the purchase and sale (or sale and purchase) of company stock if both transactions occur within a six-month period.
Tipping
Tipping occurs when an insider shares material non-public information with someone else, who then trades on that information. Both the tipper and the tippee can be held liable for illegal insider trading.
Transaction Code A
Transaction Code A on Form 4 indicates a grant or award of securities, typically stock options, restricted stock units (RSUs), or other equity compensation. This represents compensation rather than a purchase decision.
Transaction Code F
Transaction Code F on Form 4 indicates a tax withholding transaction, typically when an insider receives shares but has taxes withheld by selling a portion of those shares to cover tax obligations.
Transaction Code M
Transaction Code M on Form 4 indicates the exercise of a derivative security, typically stock options. This is when an insider converts options into shares, which may or may not indicate positive sentiment depending on whether they hold or sell.
Transaction Code P
Transaction Code P on Form 4 indicates an open market purchase of securities. This is when an insider buys company stock on a public exchange at market prices, representing one of the strongest bullish signals.
Transaction Code S
Transaction Code S on Form 4 indicates an open market sale of securities. This is when an insider sells company stock on a public exchange at market prices, which can signal various things depending on context.