Locked In
Candlefocus EditorLocked in is a term used to refer to certain securities that an investor may be unwilling or unable to trade. This occurs due to regulations, taxation or other penalties that make it unprofitable, disadvantageous or illegal to make a trade. Locked in securities are common for stocks, options and warrants offered through employee incentive programs, initial public offerings (IPOs), and other investment activities.
Employee incentive programs often suggest a mandatory vesting period in order to encourage team members to stick around long-term. During the vesting period, the employee is allocated stock options or warrants with limited or no ability to trade shares. This type of arrangement is referred to as being "locked in", as the employee is unable to take advantage of any market benefits or perceived changes in value until the restrictive period is over.
Shares issued in an initial public offering (IPO) may also come with locked in rules, meant to prevent insiders from gaining an unfair advantage while trading. For example, those who receive shares through an IPO may be subject to a lock-up period, which prevents them from selling their shares for a certain period of time after the offering is completed. This helps to ensure that supply and demand is held steady until everyone has had a chance to buy in.
Taxes also have a role in locking in investments. For example, investors in the U.S. may be subject to penalties for early withdrawal from retirement accounts, such as a 401(k), should the funds be needed prior to the appropriate timeline. This creates an unwilling and involuntary locking in of funds, as any penalties that occur have a direct effect on return on investment.
Locking in investments can have both negative and positive effects. On one hand, it may limit the return on investment that an investor can expect, and can constrain the possibilities of large-scale market activities. On the other hand, it may prevent risky trades in order to protect the investor’s financial security.
Ultimately, whether or not being locked in is advantageous or disadvantageous will depend heavily on the individual investor and the circumstances surrounding the particular security in question. Being knowledgeable of the securities and regulations, both in terms of the investment and taxes, will go a long way in helping an investor to successfully navigate and understand any locked in situations that may arise.