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The post-IPO lockup period: opportunities and risks for investors


A company's listing on the stock exchange, or IPO, is always a high—profile event in the world of finance. Investors are looking forward to the opportunity to buy shares of a promising new company. But immediately after listing on the stock exchange, one important mechanism comes into play, but not always obvious to beginners — the lock-up period.
In simple terms, a lockup is a "freeze" of stocks. This is a period of time, usually from 90 to 180 days, during which insiders — the company's founders, top managers, and early investors - are not allowed to sell their shares. This is done in order to prevent the collapse of quotations immediately after the IPO.
Why do we need this "lock"?
Imagine a situation: a company has successfully conducted an IPO, and its shares have started trading. And then everyone who received these shares almost for nothing in the early stages decides to sell them at once and record a huge profit. A huge number of stocks splash onto the market, supply dramatically exceeds demand, and the price plummets. New investors who bought shares at the IPO remain at a huge loss.
To avoid such a scenario and stabilize the price at first, a lock-up is introduced. It gives the market time to digest the new placement and appreciate the company. For new investors, this is a kind of guarantee that the "oldies" will not bring down the price in the first few days.
What happens when the "lock" is removed?
The end of the lockup period is the moment of truth for the company's shares. This is the date that all investors circle in red on the calendar. From that day on, insiders get the opportunity to sell their securities. And here there are two main scenarios.
Negative scenario: insiders start selling shares en masse. This may be a signal to the market that they do not believe in further growth of the company and just want to cash out their profits. Other investors, seeing this, also start to panic and sell. As a result, the stock price can really fall a lot.
Positive or neutral scenario: insiders are not in a hurry to sell their shares or sell them in small parts. This tells the market that they believe in long-term business prospects and are not interested in short-term benefits. Such a situation, on the contrary, can strengthen confidence in the company and support its quotes.
How should an investor use this information?
Knowing the end date of the lock—up period is an important advantage. Experienced investors always take this factor into account in their strategy.
Some possible actions:
- Caution before the end of the lockup: many people prefer not to buy shares of the company shortly before removing the "lock" or even reduce their position, waiting for a possible fall.
- Buy on drawdown: if the stock price has really fallen after the end of the lockup, but the company's fundamentals remain strong, this may be an excellent opportunity to buy cheaper securities.
- Insider behavior analysis: after the end of the period, it is important to monitor reports on insider transactions. Their actions can say a lot about the real state of affairs in the company.
Ultimately, the end of a lockup is not a verdict, but simply one of the risk factors that must be considered. This is a test of the company's strength and a test of the faith of its founders in their own brainchild. For an attentive investor, this event opens up both risks and new opportunities. Up-X kullanıcı yorumları