The IPO frenzy in the first two quarters of the year means that we are on the brink of a lockup expiration frenzy. This could either mean a buying opportunity or a signal to stay away. I will explain some possible scenarios in this discussion over how to play lockup expirations.
For those of you who are unfamiliar with the terminology, I will explain what a lockup period/expiration is and why it is significant.
A lockup period follows a firm’s IPO, where it restricts some shares from being traded until 90 – 180 days after a firm debuts its shares to the public market. The restricted shares typically include employee stock options, executive owned shares, and early investors’ ownership. The reason for the lockup period is to prevent a massive sell-off in the first day of trading.
What this lockup period creates is a time when this expanded liquidity can be unleashed on the markets. The surge in liquidity could shoot a stock down with an overload of sell orders. With an increase in public float, a lockup expiration could trigger a buy from institutional investors with specific liquidity criteria for its investments.
Lockup expirations are on most shareholders’ and traders’ calendars as some attempt to profit off of this public knowledge. Regardless, stocks tend to slide around their expiration, typically dropping 1-3%, according to Market Beat.
Pinterest and Zoom released their restricted shares yesterday, and both have endured a recent price decline.