An initial public offering (IPO) lock-up period is a period of time after a company has gone public when shareholders are prohibited from selling their shares. During the IPO lock-up company investors cannot sell their shares, helping to ensure an orderly IPO and more stable price.
Lock-up periods usually last between 90 and 180 days. Once the lock-up period ends, most trading restrictions are removed.
Why there is an IPO lock-up period?
Literally, lock-up periods are all about providing support to the share price, avoiding volatility and stabilizing the market for shares in the initial months after listing. If many investors decide to sell a large amount of their stock then this could seriously depress the share price, which is not in the interests of the company or any of its investors.
What happens to a company’s stock price after a lock-up period ends?
After a lock-up period expires, a stream of new shares can come onto the market. If the share price has raised since the IPO, then early investors may want to cash out, or if the price has tanked, then they may want to cut their losses.
However, it's not obligatory they will sell but decide to hold the shares in the hope of more gains in the future, or because they may believe shares could recover any value lost in the early days as a public company (which often happens with IPOs). It's important how the share price has performed to compare with the IPO price.
There is no definitive answer to how the end of a lock-up period will impact stock prices. This is very individual to each particular stock – some will drop, others will soar. The only thing that can be predicted that lock-up period expiration will lead to temporary increased volatility.
