What Investors Should Know About IPO Investing

What Investors Should Know About IPO Investing

Shareholders, particularly newcomers to IPO investing had their hearts in their month earlier in the month when ride-sharing company and recent initial public offering (IPO) Uber Technologies Inc.  UBER, +3.08% approached the lifting of its “lockup” period early this month, only for the stocks to crumble 17% over just a few days.

Some of the UBER losses are attributable to its Q3 earnings report on Nov. 4, but the lockup expiration certainly played a role in the sell-off,” said Dennis Hobein, senior analyst at research firm Briefing.com. 

The Uber case is one of the reasons several investors remain dreadful of IPOs. However, the volatility of the capital market, particularly with IPO investing does not mean investors should stay away from IPOs until the lockup ends. However, it is worth keeping in mind as the lockup is not an automatic reason not to invest, either.

Many companies compensate their teams with large stock awards. However, they do not want employees to sell large amounts of stock as soon as the company starts trading so they use “lockup” periods, which typically last between 90 and 180 days to prevent employees and other insiders from selling their shares once the company goes public. This could increase the volatility of the stock, depending on lockup restrictions, and those are not always set in stone, either.

Lockup periods are important for investors to monitor because the supply of stock available in the public market (known as the float) can increase significantly once insiders begin selling,” Hobein said. “Unless an accompanying increase in demand meets this new supply, the stock price is likely to fall, at least in the near-term.”

However, it is worth noting that a stock typically will react to the lockup period ahead of time. Consequently, shares will often decline a few days or more prior to the expiration date as investors seek to exit the stock before the new supply hits. This phenomenon might have played out in the case of UBER.

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