When you are running a business, you must get to understand the market well and know how it operates. You should be aware of the stock market and all the variations in place. Any company that goes public needs to file an initial public offering (IPO). IPO, therefore, becomes the ultimate means of achieving private equity. There should also be the inclusion of a clause to specify a period for lock up and its expiration date.
What Is the IPO Lock-Up Period?
An IPO lockup period is an agreement or more of a contractual restriction. The period restricts all insiders in the company, including investors, shareholders, owners, managers, and employees, from selling or purchasing shares. In other cases, the same is applicable to venture capitalists and some private investors. The lock-up goes for a stated period after the company goes public.
The period of lock-up is not a statutory requirement from any regulatory body. It has, however, become a standard that companies have imposed on themselves.
The waiting period often varies depending on the agreement. In most cases, however, the period ranges from 90 to 180 days from the date of the IPO. The lock-up ends in a time known to be lock-up expiration. After the expiration period, the insiders can freely buy and sell ordinary shares to their wishes.
Why IPO Lock-Up Periods Exist
The notion behind the period of lock-up is that insiders often own a higher percentage of stock shares disproportional to the general public. Once the company goes public, its high share transactions could affect the company’s share prices.
The point of implementing a period of lock-up is to shield the company from the negative short-term economic impact—the results of insiders selling a large number of shares of their stock after the IPO. The fact is that insiders can take advantage of the higher price set by the IPO and sell their shares. The long-term result of this is that stock prices would inflate with more shares entering the market.
There are times that prospective investors lack faith in the prospects of the company. Such a notion that insiders tend to take profits has adverse effects on the company’s stock performance. Lock-up, therefore, tends to restore the faith. Although there is inadequate proof to support the purpose of the period of lock-up, there are some reasons for it as outlined below:
- It gives a reasonable period for information being known to insiders before the IPO to be shared with the general public
- The company also gets time to justify their prospects and change the perception of the general public. It gives investors a point to have faith in the profits of the company after going public
- It also helps avoid volatility and stabilize the market shares, a move to support share prices after public listing
Are Lock-up Periods Effective?
Many investors and economists still debate on how effective periods of lock-up are. The theory behind it is that the share prices of the company are a true reflection of the company’s stock information. Stock trading will, therefore, be at a fair price in regards to the stock exchange.
Investors can take advantage of the period to choose stocks that will do well in the market. The expiration date of the lock-up is significant for such investors. The result of the market timing is that the movement of share prices and large trades is evident.
With market timers focusing on the period that IPO lock-up expires, other investors see no need for it. The information shared and made public should be of significance to the creation and movement of stock prices.
Understanding Large-Cap Stocks
When investors talk of market stock capitalization, they refer to the company’s total value of the outstanding stock. In other terms, market capitalization is the total cost of outstanding shares of a public traded company. A company is known to have a large-cap stock when it has market caps above 10 billion dollars. There are many large-cap stocks that an investor can choose to trade with.
Lock-up periods are significant when companies forecast their share prices effectively after period expiration. The company should focus on how the share prices are performing during the period of IPO lock-up. Also, look at how the business is doing after an IPO. It is a fact that some companies haven’t shown positive prospects and profits after IPO.
Being strategic is vital. Gain insights by getting to know the number of shares that the lock-up will impact.