Insider buying refers to a stock purchase made by a director, officer, executive or employee within the company that owns more than 10 percent of the company’s voting shares. When enacting an open market transaction, the insider is tasked with filling out applicable documents for the SEC to prevent the violation of insider trading laws.
Outside investors tune in when open market transactions occur as the buying or selling of securities can help determine the outlook of the company. When an insider sells shares due to low earnings, outside investors can usually expect the share price to fall. If an insider is buying shares because a product has become increasingly successful, outside investors can usually expect the share price to dramatically rise.
There are two main types of insider transactions: open and closed. An open -market transaction is one that occurs on the open stock market where the average investor can sell or buy shares. The purchase is generally completed through a brokerage firm with shares held in a brokerage account. The biggest difference between a purchase made by a normal investor and that of an insider is that the insider must follow rules and regulations established by the Securities and Exchange Commission.
Once an insider places an order to sell or buy shares, the open market transaction process begins. When buying or selling company shares, the transaction must adhere to the rules and regulations set by the SEC and must be at or close to the market share.
Open market transactions do not involve any special pricing and must be reported to the SEC, including all details relevant to the purchase or sale of shares. The reason for the transaction must be given, which provides other investors with insight into the company. SEC Form 4 is the document that must be completed and filed by the insider before selling or buying shares. This document includes information such as the insider’s name, relationship to the company, the number of shares traded, and the cost.
Insiders may choose to buy or sell shares for many reasons. Buying shares is considered more advantageous for a company as it indicates that the business is experiencing success. However, an insider may also choose to sell shares to take advantage of any profits the investment has accrued or simply to gain access to cash. The flexibility gives insiders greater control over the shares of a company.
There are also some other key benefits of open market transactions, including the following:
Open market transactions can help companies achieve growth and success. If insiders buy shares at the appropriate time, that can cause the share price to skyrocket.
Stakeholders have an interest in the firm’s performance and play a critical role in the market. Open market transactions can help increase the trust of stakeholders and create more transparency into the health of a company.
It is important not to confuse open market transactions with central banking programs like open market operations. Under these programs, government securities such as bonds are bought or sold in the open market by the Federal Reserve. To learn more about open market transactions or to speak with an experienced M&A advisory firm, contact Hartman Executive Advisors.