While reading the newspaper or skimming through the internet, you may have frequently come across the term “IPO – Intial Public Offering” and wondered what it meant. Today, we’ll explain what an IPO is and what is the lock-in period in case of IPO.
What is an IPO?
What then is an IPO? Initial Public Offering, also known as an IPO, is the procedure by which an unlisted company or shares converts to a publicly traded firm by first selling shares to the general public. A corporation can raise equity funding from the general public through an IPO. This procedure, which is also known as “coming public,” allows the business to develop and grow more quickly.
IPO Application Process
Let’s examine the IPO application process:
- Go to the ongoing IPO section after logging in on the broker’s website or mobile application, respectively.
- Choose the IPO – Initial Public Offering for which you want to apply.
- Fill out the UPI Id and submit the form.
- Verify the payment mandate sent by your broker by visiting your UPI app.
- The sum will be blocked in your bank account following a successful authentication.
- If you are allotted shares, your Demat & Trading account will be credited with the shares and the blocked amount will be debited.
- The blocked money will be transferred to your bank account if you do not receive the allocation.
Don’t get carried away by the company’s buzz created by the media if you wish to invest in an IPO. Make sure you conduct your own research. Before you desire to participate in an IPO, always refer to the issuing company’s preliminary prospectus, sometimes known as the “Red Herring Prospectus.”
IPO and Lock-In Period
After a company’s Initial Public Offering , a lock-up period is meant to restrict early investors and insiders from selling their shares for a defined length of time (IPO). In the beginning, it lessens selling pressure on publicly traded companies. Private businesses are typically owned by the founders, employees, venture capitalists, and private investors. They go public with the company for two reasons. The first step is to raise money for the company’s expansion. They also want to partially return their initial investment, which is the second justification.
Although freshly listed companies choose the number of shares to issue, it is uncommon for founders or early investors to keep sizable stakes in the business after the IPO. The share price might decline dramatically if one or more of them decide to sell a big amount of their shares, which would not be in the company’s or any investor’s best interests. Existing shareholders are consequently frequently prohibited from selling their shares for a predetermined period of time after the IPO, typically 90 to 180 days. Finally, lock-up periods promote share prices, reduce volatility, and stabilise the share market in the months following listing.
What Takes Place To A Company’s Share Price When A Lock-In Period Expires?
The primary shareholders of the company are allowed to sell their shares after the IPO lock-in period has passed. A wave of new shares could join the market if the owners of those shares opt to sell. Early investors might try to cash in by selling a portion of their ownership if the share price has increased since the IPO; conversely, if the price has decreased, they might desire to reduce their exposure. It does not, however, ensure that they will sell either way since they can decide to hold onto shares in the hope that prices will continue to rise or because they believe shares will make up for any value lost in the company’s early years as a public company.
The share price’s performance in relation to the Initial Public Offering price is frequently highlighted, but it’s crucial to remember that early investors most likely paid far less. As a result, many early investors will still be able to profit even though the share price has performed poorly since the IPO. The conclusion of a lock-up period sends an important message about the confidence of the company’s key shareholders. Institutional investors’ decision to sell the shares after the lock-in period has passed shows that they don’t have much faith in the company. These investors’ small share sales suggest that they want to hold their shares and are bullish about the future of the business.
The stock price typically decreases when a corporation’s share count significantly increases. On the first day that lock-up shares may be traded, it is not all that typical for a company’s share price to decrease. In actuality, if other investors who are exempt from the lock-in period begin to sell in the days before it ends, it shows that they believe the share price will fall.
There is a case to be made, though, that the end of a lock-up period might be advantageous if there is an early sell-off because it also indicates that the stock has increased liquidity, which major investors and financial institutions enjoy. Since it is common for the majority of a stock’s shares to be subject to it, the lock-up period’s liquidity restrictions may prevent them from initially meeting the requirements set forth by institutions or pension funds.
How the end of a lock-up period may impact share prices is a question that cannot be answered with certainty. Each stock is different, and some will struggle while others will do well. We can reliably predict that the stock will experience increased volatility in the near future as a result of a lock-up period expiring.
How May The Share Price Be Expected To Be Affected By An Expiration Lock-in Period?
Since the first public offering, how has the share price performed? Investors can be enticed to sell the stock when the lock-up period is over if its value has increased since the business’s original public offering. They might be dissuaded from selling if it has fallen sharply, but they might also be persuaded to reduce their exposure and lessen some of their losses. Since their entry point will be lower than the IPO price, they may still be able to sell at a profit even if the share price underperformed after listing.
How Does The Share Price Perform In The Days Before The Lock-Ip Period Expires?
This frequently reveals how other investors believe the share price will change when the lock-up period expires. Who is the owner of the shares that are locked up? Knowing who owns the shares that are subject to the lock-in may help determine whether they will liquidate their holdings when it expires. Take into account the rationale behind each shareholder’s viewpoint as well as their ownership of it. For instance, founders and management are less likely to sell significant interests than institutions or funds that invested early on if they own the majority of lock-up shares. Employees who receive stock options as compensation will execute them as quickly as practicable.
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