If you’re interested in investing in tech startups, you’ll need to know about the lockup period. Affecting every IPO, the lockup period is a time window wherein insiders can’t sell shares on the open market.
How the Law Restricts Company Insiders From Selling Shares
It’s typical for companies to compensate their corporate teams with stock awards. After all, it is more cost-effective to compensate employees with shares than with cash. Furthermore, this type of compensation keeps employees motivated to ensure the long-term health of the company.
However, it isn’t good for publicity when insiders sell stock shortly after the company IPO. This can hurt investor confidence and spur doubts about the overall health of the startup.
When early investors liquidate shares too soon, this can inspire finance journalists to indulge in loose talk about “get-rich-quick schemes.”
Though day trading is an inevitable part of market capitalism, companies typically hope that all stockholders will hold onto their shares for the long term. Even after the end of the quiet period, it is relatively rare for company executives to cash out significant amounts of stock right away. Besides following the letter of the law, executives must follow customary practices if they want to maintain their reputations.
Tracking Lockup Dates
As soon as the lockup period ends, the amount of stock available for purchase can balloon. If this increased supply isn’t matched by increased demand from investors, the share price can drop. However, it gets a bit more complicated than that.
Sometimes, a price dip will happen well in advance of the lockup expiration. For example, Uber’s share price dropped months before the end of Uber’s lockup period. In investor parlance, the lockup period is also known as the quiet period. Keeping track of this period’s expiration date can help you with your trading strategy.
If you purchase a stock on IPO day and have buyer’s remorse, be sure to sell your stock well before lockup expiration. If you’re absolutely confident about the stock in question, a lockup-related price dip can provide you with a great opportunity to buy.
IPOs Are Still Hot
Despite the ill effects of COVID-19, stocks in most industries remained healthy. Surprising many, 2020 saw a spike in IPOs compared to the previous year. Not since 2014 had startups raised so much money for IPOs.
DoorDash and Airbnb are two companies that recently had well-publicized IPOs. Both of these digital startups have elicited great excitement from retail and institutional investors alike. Smart investors continually conduct research to hone their financial knowledge. This is doubly important for anyone engaging with the volatile world of IPO investment.
Financial websites can give you access to free, cutting-edge tips from working professionals in the finance sector. As you invest, remember that past results are no guarantee of future performance. Do not heed anyone who tantalizes with promises of guaranteed stock returns.
Nevertheless, anyone who exercises due caution should be able to invest in stocks without the major risk of insolvency. Quiet periods help ensure that retail investors have a fair chance of profiting from newly listed companies. According to SoFi, quiet periods can be a good time to assess whether you’re interested in investing in a company’s IPO