It seems like there's a never ending flow of filings that public companies are required to issue by the Securities and Exchange Commission (SEC). Nearly all of them are referred to by a dizzying combination numbers and letters. Federal agencies seem to have a propensity for abbreviations, but that's another story.

With so many different filings required by the SEC, it can be difficult for investors to discern which ones are worth looking at from those that don't even garner a cursory glance. Well one of the most important filings generally isn't filed by the companies themselves but larger investors that are acquiring significant chunks of a company's stock. That particular filing is known as the 13D, and it has to be filed when any investor acquires more than a five percent stake in a public company. The filing must be made within 10 days of breaking the five percent threshold.

The 13D is useful because it can give the average investor the ability to follow the so-called “smart money.” Maybe a billionaire investor known for spotting good opportunities on the cheap is acquiring shares of Company XYZ. He's not going to broadcast this fact to the world, so the only place you can find out about it ahead of the herd is through 13Ds. Obv you'll be able to buy ABC shares at the same price the big guy did, but something has motivated him to acquire five percent or more of this stock and that something can make you some money, too.

That's just one example of how we can profit using 13Ds. Let's take a look at two others, following the activist investor and following the smart money.

The Activist Investor

Another class of investor that is likely to be revealed through 13D filings is the activist investor. This may be an individual, hedge fund or similar entity, but their ai is always the same: To leverage their purchase of a company's stock against the current management team in order to effect change.

For example, an activist may already hold shares of Company XYZ, but it may not be satisfied with the current management's ability to generate shareholder value. The investor may acquire more shares in an effort to possibly get a couple of seats on the board or force the company to sell itself. These intentions will be declared in the 13D, and astute investors may decide to buy shares in a company that an activist group has taken an interest in.

That's actually one of the best things about 13D filings: The group that is making the filing is believed to not be a passive investor like a mutual fund or pension manager. Therefore, the SEC requires them to be quite explicit as to why they've acquired five percent or more of XYZ shares. It's almost like a roadmap for the regular investor to follow.

Filings, particularly 13Ds, can be useful tools for short-term traders as well. Figure it this way, if you're short XYZ, you'd hate to find out that an activist investor is going to be adding to his position because this is likely to lead to a spike in the stock. Your bad trade could have been avoided by reading the 13D.

Following the Smart Money

There's a reason the term “smart money” exists and it's because members of this group are winners more often than not. While it can be difficult for the average investor to follow the pros, 13Ds represent one of the best opportunities to do so. With the vast array of investment resources available on the Internet, there are more Web sites devoted to following 13D filings than ever before.

One important aspect, of studying these filings, is knowing what to look for. If you come across a 13D that has been filed by a hedge fund you've heard of or an activist investor like Carl Icahn, chances are this stock is going to pop once more people see the 13D. A few Web searches of activist investors and 13D will probably help you turn up a lot of other names worth looking for when studying these filings.

There are usually several 13Ds filed every business day, so one could make a full-time job out of tracking them. That's not necessary. Start by watching the 13Ds of stocks you already own. Then put together your own list of activist investors you want to watch and keep up with their filings. Once you know what to spot, 13Ds are fairly user-friendly and extremely profitable.

Ultimately, 13Ds are the investor's best chance to play right along side the big boys. No one is ever going to stand in the town square and announce their intentions to acquire five percent of a particular stock. That's just not how the market works. But 13Ds allow us to follow the smart money, and that can make for some nice returns along the way.