I consider myself a market junkie…someone who is curious and eager to learn new ways to beat the market. However, I’m currently on vacation and I’m not really following stocks that much this week.
It doesn’t look like I’ve missed much though, markets still appear to be focused on trade talks and price action has been choppy at best.
But like I said, I’m a market junkie… so to stay somewhat fresh I’ve decided to answer some questions that I get asked a lot about trading. It also helps me review my process and further strengthen my knowledge as a trader.
Now, I subscribe to nearly trading service imaginable, including a Bloomberg terminal.
(Trading is easy or as hard as you want it be…if you don’t have time to stare at the screens today but want to build a good foundation, click here to read more.)
But here’s the thing… when I started from the bottom and worked myself up.
(four straight years of averaging over $1M in trading profits, none of it was ever given to me, you want a simple way to get started trading, click here to learn more)
Furthermore, some of the best research you can find on stocks is free. For example, in order to be a publicly traded company on major stock exchanges like the NYSE and Nasdaq firms must meet very specific regulatory, business, and accounting standards.
In other words, companies must file and disclose their financials, news, proxy votes, prospectuses and registrations, and so much more.
That said, my favorite disclosure document to look at is the Form 4. It’s the one that tells us what insiders of the company are doing… whether they are adding to their position or dumping shares.
Intuitively it makes sense right… who knows these companies better than the executives on the inside.
Read on to find out what the Form 4 is all about, where you can find it, and how to find trades with it.
Table of Contents
How to Use the Form 4 Filing
If you don’t know yet, there are multiple indicators that can signal a stock could run higher… or sell off. You’ve got your technical indicators… and then you’ve got your fundamental indicators. Now, I like to improve my chances of success, so I look at both.
For example, my catalyst runup strategy isn’t just based on technicals… or fundamentals. I combine the two.
You see, the catalyst runup involves spotting a catalyst event, such as FDA approval dates, data releases, or earnings, just to name a few… now, I also check whether the stock has insider buying or selling.
Insider Buying and Selling Explained
You’re probably wondering, “Kyle, what is insider buying or selling?”
Well, corporate insiders, directors, officers, and large shareholders (those owning 10% or more of the outstanding shares) are required to report all of their buys and sells.
The U.S. Securities and Exchange Commission (SEC) enforces these requirements… and company insiders must report whenever there is a material change in their stock holdings.
But how does knowing when someone is buying or selling stock help us?
Those who are required to report material changes in their stock holdings are often privy to information that’s unavailable to the public. I don’t know about you, but if corporate insiders are buying stock or options ahead of an event… that’s really bullish to me.
Think about it like this, corporate insiders are probably not buying stock or options ahead of an event… if they don’t think the stock could pop on the catalyst. They’re more likely to sell ahead of an event if they think the market won’t react well to the information.
Now, we might not be privy to information that corporate insiders have access to… however, their buys and sells are made available and it’s released on the SEC Edge Database.
For example, if you’re in a stock and want to see if insiders are buying or selling, just search the company name here.
What you’ll be looking for is the Form 4.
Form 4 Explained
Basically, the Form 4 gives us a lot of information, like which specific insider bought, when they bought or sold (keep in mind there’s a lag between when the Form 4 is released and when insiders bought) and the price they bought or sold shares at.
Now, you don’t have to go searching for insider transactions…
You can actually use Finviz to screen for stocks that have insider buying or selling.
For example, you can set up a filter like this:
That means we’re looking for any stock with a market cap greater than $300M, with its current price under $10, average daily volume of 750K+, and insider transactions over 10%.
This allows us to filter for insider buys. Now, you can click the insider transactions dropdown and select any percentage you like… you can even select negative percentages – indicating insider selling.
Getting back to the Form 4.
For the most part, we don’t really care if insiders are acquiring stock through restricted stock units or options… because chances are they either had to pay a small fee to exercise… or no fee at all.
What we do care about is whether they’re buying or selling at the market price.
For example, here’s a look at a biotech stock that I found that had insider transactions.
Now, Intrexon (XON) has been beaten down… but CEO Kirk Randal bought $2.9M worth of shares…
Here’s a look at a snapshot of the Form 4 filing.
If you want to see the full filing, check it out here.
You can see his transactions were all acquired around the market price… those shares weren’t given to him, nor did he get them from exercising derivatives.
What this insider buying tells us is the fact the CEO is extremely bullish on his company… and he put his money where his mouth is.
Now, according to BioPharmCatalyst there aren’t any expected data releases… so that’s really interesting. Not only that, the stock has a big gap at $6… and has been consolidating for a while.
That said, when I find stocks with insider buying and a chart pattern I like… I’ll keep it on my radar. If there was an expected catalyst in a few weeks, and I saw this insider transaction with the same chart…
Well, I would’ve looked to buy it somewhere close to $4 because that’s a clear support area…
Activist Investors and Insider Buying/Selling
Sometimes, insider buys alone can move a stock. For example, there are activist investors. Now, activist investors are just shareholders who want to spark change in an organization and due so by purchasing a large number of shares.
Now, there was one recent insider transaction that you could’ve profited on… billionaire activist investor Carl Icahn actually filed a Form 4 and purchased shares of Conduent (CDNT). Here’s a look at a snapshot of the Form 4.
If you want to see the rest of this form, check out the SEC Edgar database filing.
Someone like Carl Icahn investing in a stock should move it… and it did.
That said, you can see how powerful the Form 4 and having a little bit of knowledge about the markets can do for you. Now, if you want to learn more about insider buying and how I use it in my trading… click here to learn more.[Ed.note: Kyle Dennis runs BiotechBreakouts.com. He is an event-based trader, who prefers low-priced and small-cap biotech stocks.
Source: BiotechBreakouts.com | Original Link