Nov 11, 2019
How Lockup Periods Can Affect Stock PricesBy Jeremy Quittner
Find out how lockup periods can affect stock prices
If you’re confused by what a lockup period is, and what it has to do with a public company’s stock, read on and we’ll explain.
What’s an IPO again?
IPO is shorthand for something called an initial public offering. An IPO is the first time a company sells its shares to the public through a stock exchange such as the Nasdaq or the New York Stock Exchange (NYSE).
When a company wants to open new stores, build or acquire a factory, or expand in some other way, it may need additional resources to pay for it. Company executives may use an IPO to raise capital, or money, to grow a business.
Often a company does not yet have enough internally generated funds to finance such projects. Going public is one way to raise a relatively large sum of money in a relatively short period of time.
It’s important to know that following an IPO, a new stock can be subject to significant increases or decreases in market price. That’s known as volatility. Stock volatility can be particularly high in the first few months following an IPO and as a result, so can the potential for short-term losses.
What’s a lockup period?
Often, fluctuations in stock prices occur following an IPO, due to the expiration of a lockup period. A lockup period is when company insiders, such as employees granted stock options or executives who own shares, sign an agreement that prohibits them from selling shares for a specified period of time. (For both Uber and Beyond Meat, the lockup period was 180 days following their respective IPOs.)
When lockup periods expire, insiders or other early investors may want to sell their stock in order to make a profit from their shares. Remember that previously, the company was private and there was no public market for their shares.
When these insiders start to sell their shares, sometimes that can cause a company’s stock price to fall. That’s because more shares become available for investors to buy. And an increase in the number of shares for sale can cause prices to fall. (It’s one of the basic laws of economics, called the law of supply and demand. Essentially, if there’s more of something, such as stock, and demand remains constant, prices fall.)
Find out more
You can find out more about the lockup period and other information about Beyond Meat, Uber, or any other company that has had an IPO by looking at the prospectus, a publicly available document on the Securities and Exchange Commission’s website EDGAR.
Remember the Stash Way—invest for the long-term, invest regularly, and don’t put all of your eggs in one basket.