It’s always a good idea for investors to pay attention to insider trading to gauge the climate of company management. However, sometimes monitoring insider trading is a bit trickier than it seems when the insiders themselves are trying to keep their activities masked.
Everyone’s heard the old adage that actions speak louder than words, and that rule is certainly true on Wall Street. That’s why the market often pays particularly close attention to insider trading, and large insider buys and sells can be major catalysts for a stock.
Form 4 Farming
Insiders are required by law to file Form 4 disclosures every time they make a stock trade. However, every insider sell is not necessarily an indication that there’s something wrong inside a company. Insiders often get thousands or millions of dollars’ worth of company stock as part of their compensation plans. In order to monetize those shares, insiders can set up a trading plan to routinely sell shares into the market over time.
One way to differentiate a planned purchase or sale from a potentially spontaneous sale is to look at the transaction code on Form 4. There are 20 different codes for insider transactions. The type of transactions that most traders will be looking for are buys, with the code P, and sells, with the code S.
Transactions with the code V are voluntarily reported earlier than legally required to be disclosed. Other types of transaction codes indicate various other unique situations that may not necessarily be an indication of the fundamentals of the company. A full rundown of the Form 4 transaction codes can be found here.
Tricks Of The Trade
One thing company insiders can do to avoid tipping off the market to large buys and sells is to break them up into smaller lots. A single 1-million-share sell may set off red flags in the market, whereas 20 different 50,000 sells might fly under the radar.
Sometimes, these insiders can take it a step further to mask their large transactions. Traders may easily recognize a series of 50,000-share buys as a part of a much larger order, but if the million-share order is split into smaller orders of varying sizes, it might be more difficult to recognize the individual transactions as all being part of a larger move.
Learning By Example
Firsthand Technology Value Fund Inc SVVC 2.62% Chief Investment Officer Kevin Landis has been purchasing 1,000 shares of Firsthand stock every trading day since Oct. 17. On the first two days, Landis reported all 1,000 shares in a single trade. Since that time, Landis has broken his buys up and altered his pattern, breaking the 1,000 shares into 500/500, 600/400 and even 490/510 pairs.
Traders may look at a series of 500-share purchases in a stock such as Firsthand and think there’s no meaningful insider action going on. After all, 500 shares of an $8 stock is only a $4,000 purchase. However, over an 11-day stretch, Landis has reported 18 different purchases totaling 10,600 shares of stock worth roughly $83,500. For a stock with a market cap of only $58 million, that type of an insider purchase might raise eyebrows in the market.
Yet if Landis’ plan was to fly under the radar, it seems to have worked to perfection. Since the stock’s close on Oct. 16, the stock has drifted mostly sideways, down 1.7 percent overall.
Best Insider Info
Traders can monitor insider trading by checking the SEC website for newly-filed For 4s or by monitoring insider trading sites like InsiderCow.com. Of course, the quickest way to get instant notifications of any significant insider activity is…
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