Insider Trading 101

Company insiders have to report their trades in their own company's stock, and investors watch those reports closely. This guide covers who counts as an insider, when insider trading is legal, the kinds of insider trades, and which ones tell you something.

What is insider trading?

Insider trading is when people with access to a company's non-public information, its insiders, trade its stock. Amazon's CEO buying Amazon shares, or Visa's president selling Visa shares, are both insider trades.

Insiders go well beyond the CEO. A company's officers, directors, many employees, large shareholders and even their families can all know things the public doesn't. The SEC's reporting rules, though, apply to a narrower group, described below.

Is insider trading illegal?

Not always. Insider trading is illegal only when the insider trades on material non-public information.

Material non-public information

Information the public doesn't have that could reasonably be expected to move the stock's price: earnings before they're announced, a pending deal or lawsuit, a product failure. Once it's public, through a press release for example, and the market has had time to take it in, it no longer counts.

Illegal insider trading

Trading on material non-public information, or tipping off someone who does, is illegal. The SEC investigates suspicious trades and brings civil charges, and prosecutors can bring criminal ones, with fines and prison.

Legal insider trading

Insiders may own and trade their company's stock, and many companies want them to: a CEO who believes in the company's future can buy its shares and share in its success. The trade just mustn't be based on material non-public information, and it has to be reported. Companies also set blackout periods, usually around earnings, when insiders can't trade at all.

SEC Form 4

Insiders report their trades on Form 4 within two business days, with the date, the number of shares, the price and how many they hold afterwards. That speed makes Form 4s one of the most current views of a company's ownership. HedgeFollow's Insider Trading Tracker picks them up within minutes; follow a stock to see its insiders' trades in My Tracker.

Form 144

An insider planning to sell restricted or control shares, more than 5,000 shares or $50,000 in three months, files a Form 144 when placing the order, before the sale. HedgeFollow shows these as proposed sales.

Rule 10b5-1 trading plans

Insiders come across confidential information all the time, so many trade through a 10b5-1 plan: a schedule of purchases or sales set up in advance, carried out by a broker. Trades made under a plan adopted in good faith, while the insider had no inside information, are protected even if the insider learns something later.

Rules in force since 2023 make plans harder to game. There's a cooling-off period of up to four months before an officer's or director's first trade, limits on overlapping plans, and a checkbox on Form 4 that marks trades made under a plan.

Types of insiders

The SEC's reporting rules cover:

Officers: the CEO, CFO, COO and other executive officers.
Directors: every member of the board.
10% owners: people and institutions, hedge funds included, that own more than 10% of the company.
Other: insiders that don't fit the groups above.

The groups overlap: a director can also be a 10% owner, so one insider can carry several flags. HedgeFollow lists them all under each insider's name, and adds separate flags for the CEO and CFO so you can tell them from other officers.

Types of insider transactions

Insiders report far more than purchases and sales. HedgeFollow sorts their transactions into plain categories:

Buys and sells: purchases and sales of shares.
Buy plans and sale plans: purchases and sales made under a 10b5-1 trading plan.
Tax withholding: shares sold or withheld to pay tax, often when stock awards vest.
Awards: shares granted as pay.
Gifts: shares given or received.
Derivative exercises: shares from exercising options or converting other securities.
Change of control: large transfers that move control of the company.
Will or inheritance: shares received from an estate.
From or to a trust: shares moved between an insider and family trusts.
Disposed to issuer: shares returned to the company.
Other: everything else.

For most investors, buys and sells are what matter.

Informative trades

Not every buy or sell says something about the company. A sale scheduled months ahead in a trading plan, or shares sold to cover tax, tells you little about what the insider thinks today.

What is an informative trade?

HedgeFollow counts a trade as informative when all of these hold:

It's a buy or a sell.
It isn't part of a 10b5-1 trading plan.
It isn't redundant, such as the same trade reported by several people.
It isn't over-reported.
It isn't to cover tax.
It changes the insider's total holdings, rather than moving shares between an insider's own accounts or family members.

No classifier catches everything, but this one removes most of the noise.

Informative buys vs. sells

Even among informative trades, sales usually outnumber buys. Insiders receive much of their stock as pay and sell some of it over time to diversify or for personal reasons. So insider buys generally carry more weight: there are many reasons to sell a stock, but usually only one to buy it.

Notable insider buys

One of the best known: in early 2016, JPMorgan's CEO Jamie Dimon bought more than $25 million of JPM stock when it had fallen sharply. It was a striking bet for someone who already owned so much of the company, and the stock doubled within two years.

Insider buys can also be meant to build confidence. Lyft's CEO David Risher bought over $1 million of the company's stock, saying he wanted people to see he had skin in the game. Whatever the motive, insider buying remains one of the most watched signals on any stock.

Members of Congress

Members of Congress aren't company insiders, but under the STOCK Act they report their own trades, and their families', within 45 days. How they report them, and what the reports leave out, is explained in the wiki. Their trades are in the Congress Stock Tracker.