Open market transactions occur when “insiders” buy or sell shares of their company. Insiders, a term often used to describe directors or senior officers, own a significant portion of a company’s shares and therefore have a keen interest in buying or selling shares when lucrative opportunities arise. Some forms of insider trading have been made illegal in the United States by the Securities and Exchange Commission (SEC). However, transactions made by corporate insiders are typically legal when performed as an open-market or cloud-market transaction.
The Basics of Open Market Transactions
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.
How Do Open Market Transactions Work?
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.
How Are They Different from Closed-Market Transactions?
A closed market transaction is essentially the opposite of an open market transaction. In a closed market transaction, trading is performed between the company and the insider and no other parties are involved in the process, including the SEC. Closed market transactions most commonly occur when an insider receives shares as part of a compensation package. Large insider sales may occur for a wide variety of reasons, such as a departure from the company, an opportunity to realize profits or a stock sale completed before retirement.
The Open Market Transaction Process
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.
Benefits of Open Market Transactions
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:
Few Trade Regulations
Open market transactions are obligated to follow rules and regulations set by the Securities and Exchange Commission but overall, insiders face few trader regulations. Purchases or sales in an open market transaction are performed voluntarily by insiders. These transactions do need to be disclosed, but the trading activity is generally not regulated by any set company rules.
Potential Company Growth and Success
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.
Increased Trust of Stakeholders
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.
Speak with an M&A Advisory Firm Today
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.