An Initial Public Offering (IPO) is when a company issues its shares to the public for the first time. This is a significant milestone for the company as it introduces a new avenue for raising funds. For investors, it is a chance to invest early and earn potentially great margins on the stock. While stock prices are subject to market movements, there are several regulatory mechanisms in place that try to stabilise the share price during the initial days of trading, and one such mechanism is the IPO lock-up period.
What is an IPO Lock-Up Period?
An IPO lock-up period is when the company’s insiders, early investors, and employees are restricted from selling their shares for a certain predefined period after the IPO listing. This period is usually between 90 to 180 days, though depending on the strategy of the company and the regulatory requirements, it could be even shorter or longer. The purpose of the lock-up period is mainly aimed at preventing insiders from pulling their investment which would lead to a drop in the stock price.
How Are Shares Allotted in an IPO?
Before understanding the impact of a lock-up period on your investment, it is good to know how shares are allotted in IPO.
It is normally done by a lottery or on a pro-rata basis whenever the IPO is oversubscribed, in that the demand for shares is more than the supply thereof. Retail investors usually apply for shares from their brokerage accounts or intraday app. Once an allotment is made to them, they get it deposited into their Demat accounts, which are necessary for holding and trading shares electronically.
Why Should You Care About the IPO Lock-Up Period?
This might not affect you directly as a new investor or a retail investor in an IPO, but if you invested in an IPO during the initial offering, it’s important to know why this period matters.
Stability in the Market
This lock-up period gives a sense of stability to the market in the initial days of trading. The absence of this would ensure that a big sell-off by the insiders is likely to be observed, including an immediate steep drop in the price. This stability gives the investors ample time to gauge the performance of the stock based on the market instead of their volatility due to insider selling.
Price Drop after Lock-up Expiration
Normally, when the lock-up period expires, a great increase in trading volume is seen as large numbers of insiders and early investors are allowed to sell their stock. This can lower the price due to supply pressure, which may be detrimental to the value of your investment if you purchased at or near the IPO price.
Buying Opportunities
For the astute investor, the expiration of a lock-up agreement is also a buying opportunity. If it nosedives below its original price, then you can buy such shares at a lesser price with prospects that the fundamentals of the company will fuel the future performance of such stocks. Observing how well the stock is doing after the expiry of the lock-up on yourshare trading app can be an indicative tool for investors to decide.
How Can You Prepare as an Investor?
If you are investing in a company that has recently gone public, or you’re going to invest in an upcoming IPO, here’s what to do to manage the impact of the lock-up period:
Monitor the Lock-Up Expiration Date
Most companies announce their lock-up period in the IPO prospectus, accessible through brokerage websites, financial news portals, stock exchange websites, or your preferred intraday app. If you know the date of lock-up expiry, you can plan for the expected volatility.
Open a Demat Account
To subscribe to an IPO, you need to open a Demat account. The Demat account opening is an easy process, and most brokers and trading platforms provide this facility coupled with their other services. In case you are interested in trading after the lock-up period ends, look for a service that has an integrated intraday app.
Utilise Intraday Applications for Real-time Updates on Changes
A large number of investors are on intraday trading apps, which provide technical analysis, and the capability for investors to respond promptly to momentary changes in share prices. This can be quite helpful for short-term investors who may want to take advantage of price movements based on the expiry of the lock-up period.
Conclusion
The notion of a lock-up period helps stabilise the share prices by preventing insider sell-offs immediately after the issue date. Pay attention to the expiration date of the lock-up period, and assess whether the price after the lock-up period offers buying opportunities or serves as a warning signal.
Further, if you are looking to invest in IPOs, then open a Demat account with HDFC Sky, and explore various trading platforms and intraday app which would give real updates and analysis. These would be the resources you would need to move along with the stock post-IPO lock-up and changes in the market.
