IPOs are some of the most exciting events on Wall Street. Public issues provide opportunities for investors to take a stake in major companies for the first time. However, the first year of trading for newly public companies can be volatile, and one of the drivers of that volatility is lock-up expiration.
When a stock goes public, there are a lot of dynamics in play. Company insiders and private investors potentially holding millions or billions of dollars worth of company stock have a chance to turn those theoretical gains into real cash for the first time. In order to prevent a flood of selling as soon as a company goes public, companies impose a lock-up period, typically between three and six months after the IPO, during which insiders are restricted from selling their shares.
While the lock-up period temporarily keeps insiders from dumping stock, they are free to unload as soon as the lock-up period expires, making it a major catalyst for IPO stocks.
There are two general trading patterns that tend to happen around lock-up expiration time.
Sometimes, a flood of insider selling will send a stock tumbling as soon as the expiration occurs. Lock-up expiration can dramatically increase a stock’s float, the public supply of shares. Essentially, lock-up expiration can flood the market with supply, and anyone familiar with the basic economic law of supply and demand knows a flood of supply is bad news for prices but using one of the fastest trading platforms can increase your ability to profit off floods of supply.
Other times, traders will sell a stock in the weeks leading up to a lock-up expiration to try to lock in gains before expiration. Once the lock-up expiration happens and the selling pressure isn’t as bad as feared, they will buy back in and trigger a relief rally. These buyers may be joined by other long-term investors that were simply watching and waiting for the dust to settle following the expiration before determining whether or not they want to buy the stock.
In a nutshell, lock-up expirations are volatile and unpredictable, but they can be tremendous trading opportunities.
As is the case when trading any potential market catalyst, knowing when lock-up expiration is coming is the first step in the process. Companies must disclose the length of their lock-up period to the SEC prior to going public, and the best place for traders to search for lock-up expiration dates is on the SEC’s EDGAR website here.
Learn about the best trading tools for active traders to trade IPOs.
Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.
Copyright © 2001-2020, Lightspeed, LLC. All Rights Reserved.