Investing in IPOs can be an exciting endeavor filled with growth potential and some surprises along the way. One of those surprises is a lockup period investors often overlook.
When a company initially offers shares to the public, there are rules about when original investors can begin selling shares. The investment bank and regulators don't want employees and early investors flooding the market with shares at the same time the market is trying to search out a price. So there is usually a lockup period accompanying an IPO. After a set amount of time, usually six months, investors are free to trade shares.
The only problem is this opens up a flood of new shares to the market, and if employees and other shareholders are looking to cash in on a long awaited profit, that can be disastrous for the stock. Four of the highest-profile IPOs of the past few years have been A123 Systems (NAS: AONE) , Tesla Motors (NAS: TSLA) , Molycorp (NYS: MCP) , and Zipcar (NAS: ZIP) . The performance of shares was affected pretty dramatically by the end of the lockup.
Date Lockup Ended
Lockup Date Share Performance
March 29, 2010
Dec. 27, 2010
Jan. 25, 2011
Oct. 11, 2011
Molycorp is the only stock listed above that didn't drop on the day the lockup ended, but shares sold off dramatically in the weeks leading up to the lockup ending -- perhaps due to some confusion about when exactly the lockup was scheduled to end. On Jan. 4, Molycorp closed at $61.80, but by Jan. 25, shares were down to $46.89, a 24% decline in three weeks.
Know your lockup
This is something to be aware of as we approach the end of the lockup period for some high-profile IPOs in the past year. LinkedIn's (NYS: LNKD) lockup ends on Nov. 15, Solazyme's (NAS: SZYM) ends Nov. 23, and Pandora's (NYS: P) ends Dec. 12.
Whether you're looking to buy or sell, knowing when the lockup date occurs may affect your timing. More than one stock has fallen not just after the lockup ends, but leading up to it as well.
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At the time thisarticle was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of Solazyme and Zipcar. Motley Fool newsletter services have recommended buying shares of Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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