Whenever a corporate insider (usually executive level officer or director) sells or buys shares of his or her company, or exercises employee stock options, he or she has two business days to file a Form 4 with the SEC detailing the transaction. This information is considered important for outside shareholders so that they can judge if they should also be buying or selling shares. Hopefully, those shareholders will base such decisions on more than just the fact that insiders are buying or selling.
What it tells you
The basic information on a Form 4 is who the insider is and what position they hold, the details of the transaction, and how many shares the insider still holds after the transaction.
How to read a Form 4
Please open the following link in either a new window or tab to follow along as the recent Form 4 filed by Richard Kotick, CEO of Activision Blizzard, is used as an example of how to read the form. Kotick's 6/15/09 Form 4 The transactions here happened on Thursday, June 11, 2009 and the form was filed two business days later, on Monday, June 15.
There are 3 sections of the Form 4:
- Personal information
- Non-derivative transaction information (shares)
- Derivative transaction information (options, etc.)
- Box 1: Name and address of the person who did the transaction. Last name first. In this case, Robert Kotick, c/o the company.
- Box 2: Company name and ticker symbol. Self-explanatory.
- Box 3: Date the earliest transaction being reported occurred. All the transactions happened on the same date in this instance, but if they happened over a couple of days, this would be the first date.
- Box 4: If this is an amendment to a previous form, the date the original form was filed. This is the original form, so it's left blank.
- Box 5: What position is held within the company. This is indicated by a check mark. If an officer, then the position title is given. Kotick is the President and CEO of Activision.
- Box 6: This is usually filed by an individual, so that's checked.
Table I: Non-derivative transaction
This is where most of the important information is found. If the person is buying or selling shares or exercising options and selling those, this is where it is found. Plus, the person must list how many shares are owned after each transaction, so you can see if the transaction(s) being reported make up a large part of the holding or not and, thus, have a sense of how significant this transaction might (or might not) be. After all, if a person sells 10,000 shares, that may seem a lot, but not if it's out of 3 million.
There are often multiple lines. Each line represents a different transaction. Sometimes there are so many that the person will file multiple Form 4s.
- Box 1: The type of security being handled. In this case, shares of common stock. We're going to look at lines 1 through 4.
- Box 2: The date the transaction took place.
- Box 3: The transaction type, according to a set of codes. S = "open market or private sale" while M = "exercise or conversion of derivative security exempted pursuant to Rule 16b-3" which means a particular kind of option in this case. Other common codes are A for "grant award" and P for "purchase." Exact meanings of the various codes are found on page 6 of the Form 4 instructions (opens a PDF file).
- Box 4: This is divided into 3 parts. First is the number of shares, in this case 750,000 (lines 1 and 2) and 350,162 (lines 3 and 4). Then comes a notation on being acquired (A) or disposed of (D), that is, sold. In this case, as these are options being exercised, first the shares are acquired (lines 1 and 3) and then sold (lines 2 and 4). Last, the price is listed. For the options, it is the exercise price. For sales, it's either the actual sale price or an average price. That's the case here (see Footnote 2, which is referenced here in lines 2 and 4).
- Box 5: The number of shares owned after each transaction line. So, Kotick owned 3,859,729 after exercising 750,000 options (line 1). Then he sold those newly created shares, leaving him 3,109,729 shares (line 2). For lines 3 and 4, he temporarily owned 350,162 shares, and then sold them all, leaving 0 (line 4). The difference in the ownership is explained next.
- Box 6: The type of ownership is here. It is either direct (D) or indirect (I). That's why lines 2 and 4 have different totals, because the 3.1 million are directly owned by Kotick, while the ones from lines 3 and 4 were owned and sold by a particular trust account. Note that even if the person filing the form has no voting control over the shares, he still has to list them. Many times, indirect ownership will be family trusts of some type or another. Sometimes there will be footnotes giving more details on the kind of indirect ownership these represent. In this case, no such luck.
- Box 7: If the ownership is indirect, then the nature of that ownership must be mentioned here. Note that Kotick has several trusts, but he also has one or more UTMA accounts set up for minor children, so he doesn't own those particular shares, but he might have voting or decision control over those accounts until the kids attain their majority.
Table II: Derivative security transaction details
If the transactions described in Table I were triggered by such things as exercising options, then that is detailed here. The same kind of information as in Table I is provided here, but with some differences.
- Box 1: The type of derivative security, in this case, employee stock options.
- Box 2: The exercise or conversion price.
- Box 3: What day this occurred on. Note that this is the same day as the transactions detailed above.
- Box 4: The transaction type. See the instructions (opens a PDF file).
- Box 5: The number of such securities either acquired or disposed of. Because he was exercising options, not getting them, these are in the D column.
- Box 6: The date the derivative security can be exercised and the expiration date. This form uses footnotes to indicate the exercisable dates (note that these ranged from 2001 through 2004, so Kotick had been holding these, unexercised, for a while).
- Box 7: The underlying type of security and how many. These were options, each for a single share of common stock.
- Box 8: The price of the underlying security, if any.
- Box 9: How many derivative securities (options, in this case) the reporting person still owns after the transaction. Here, over 5.6 million.
- Box 10: The type of ownership, either direct (D) or indirect (I).
- Box 11: If indirect, what entity owns them.
If any of the entries require further or more detailed explanation, that is found here. This is often where the details about the indirect ownership are given as well as some details on the option plans or details on the ownership. For instance, in Footnote 3, it details the breakdown of the 3.1 million shares he still owns.
As Peter Lynch noted, executives sell shares for many different reasons, which are rarely, if ever, given. Also note that most executives treat options as part of their compensation, not as part of their long-time holding or investment in the company.
If you follow insider transactions, especially through sites that summarize the transactions, be sure you understand what you are looking at, double check against the actual Form 4, and avoid making snap judgments on the executives no longer "believing" in the company because they are selling lots of shares.
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