What exactly is a lock-in period?
A lock-in period, also known as a lock-up period, refers to a specific duration during which investors are prohibited from selling their shares. Various regulatory bodies, such as SEBI, establish different lock-in periods for different categories of investors. For instance, anchor investors typically have a lock-in period where 50 percent of their shares are locked for one month, and the remaining 50 percent for three months from the date of allotment. Promoters may have lock-in requirements for allotment, typically ranging from 18 months for up to 20 percent of the post-issue paid-up capital to six months for allotments exceeding 20 percent.
Why do investors closely monitor the lock-in periods of different stocks?
Investors closely track lock-in periods because when a company’s shares become available for trading after the lock-in period expires, it often increases the number of shares in the market, known as the free float. This can potentially affect the stock price, as an increase in supply might lead to a decrease in the company’s stock value. Consequently, investors may consider selling their holdings before the lock-in period ends, particularly if they aim to secure profits.
What is the significance of the expiration of the lock-in period for a specific stock?
When the lock-in period ends for a particular stock, there’s a possibility that a significant number of shares may enter the market, typically through block deals, thus enhancing liquidity. While it’s commonly assumed that stock prices will decline after the lock-in period ends, this isn’t always the case. Market sentiment plays a crucial role, as investors may choose to hold off on selling their shares if the market is declining, opting to wait for sentiment to improve instead.
Does historical data suggest any patterns regarding lock-in period expirations?
The impact of lock-in period expirations on stock prices varies widely. Some cases, such as Nykaa, have seen a significant drop in share prices after pre-IPO investors heavily sold their shares post-lock-in period expiry, leading to a 20 percent lower circuit. However, it’s not always the case that stock prices decline after the lock-in period ends.
Is the expiration of the lock-in period a favorable time to buy a stock?
If an investor believes in the fundamentals of a stock and observes that its price decreases after the lock-in period ends, it might present a favorable opportunity to enter the stock. However, it’s essential to consider this additional volume solely due to the lock-in period expiring and not as a sole indicator for investment decisions.
