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CandleFocus Glossary Editor
A lock-up agreement is a contractual agreement between a company and its shareholders that restricts the sale of existing and newly issued shares for a specified period following an initial public offering (IPO). The main purpose of the agreement is to prevent company insiders from flooding the market with shares during or shortly after the IPO and creating excessive selling pressure that could lead to a decline in the stock price.
The general understanding is that the number of shares available to investors after the IPO is limited, and if too many of these shares suddenly become available, the stock price could take a nose dive as more investors retreat due to the increased supply. The lock-up agreement limits this supply by temporarily prohibiting insiders, such as company officers and significant shareholders, from selling their shares for a specified period of time. This period can vary from a few months to over a year.
Once the lock-up period has lapsed and the agreement is no longer binding, there can be a sudden surge of supply as insiders are allowed to cash in their shares or count their profits. This can trigger a decline in the stock price from where it was when the agreement expired.
The decrease in price, however, may offer an opportunity for new investors. If underlying fundamentals of the company are still good despite the temporary sell-off, investors may see the dip in price as an opportunity to scoop up shares at a discount.
When entering into a lock-up agreement, insiders usually agree to certain terms such as not selling significant amounts of shares within a certain period, or even not selling at all. They also agree to hold the stock through certain key events, such as earnings reports and other material news releases.
Overall, lock-up agreements protect short-term shareholders of an IPO by ensuring that insiders do not flood the market with shares, at least for a certain period of time. When the lock-up expires and the potential of a stock price decline arises, new investors should carefully assess the fundamentals of the company before investing in order to make an informed decision.
The general understanding is that the number of shares available to investors after the IPO is limited, and if too many of these shares suddenly become available, the stock price could take a nose dive as more investors retreat due to the increased supply. The lock-up agreement limits this supply by temporarily prohibiting insiders, such as company officers and significant shareholders, from selling their shares for a specified period of time. This period can vary from a few months to over a year.
Once the lock-up period has lapsed and the agreement is no longer binding, there can be a sudden surge of supply as insiders are allowed to cash in their shares or count their profits. This can trigger a decline in the stock price from where it was when the agreement expired.
The decrease in price, however, may offer an opportunity for new investors. If underlying fundamentals of the company are still good despite the temporary sell-off, investors may see the dip in price as an opportunity to scoop up shares at a discount.
When entering into a lock-up agreement, insiders usually agree to certain terms such as not selling significant amounts of shares within a certain period, or even not selling at all. They also agree to hold the stock through certain key events, such as earnings reports and other material news releases.
Overall, lock-up agreements protect short-term shareholders of an IPO by ensuring that insiders do not flood the market with shares, at least for a certain period of time. When the lock-up expires and the potential of a stock price decline arises, new investors should carefully assess the fundamentals of the company before investing in order to make an informed decision.