How Long After IPO Can You Buy Stock (And Why)?

Exact Answer: After 150-180 days

Usually, IPO stocks are worthy and valuable investments but sometimes people tend to lose a lot of money.  Often when any existing or new company offers the public to buy the shares along with none of the shares included on the stock exchange, is known as Initial Public Offering(IPO).

The gain which is obtained through these shares is used by the company according to its needs such as to buy commercial land or new machinery and may also be used to pay the debts. The Company rewards those persons who have invested in the respective company by buying shares or sell the shares when the price is favorable for trading.

How Long After IPO Can You Buy Stock?

Generally, buying IPO stock will be engaging. But employees cannot sell or buy IPO stock for at least up to 6 months. This period is termed as a lock-up period. This period is usually helpful to prevent employees from exhausting the stock.

The lockout period comes to an end when the owners can sell the stocks to the public. But once the IPO trading has begun, it can be bought by individuals or by any company similar to other stocks. One of the disadvantages of IPO trading is fluctuations in price.

The listing process of IPO contains series of steps before entering into the stock market, like choosing a bank to provide underwriting services, offering price, and list of shares to sell has to be decided by the company which issues it. When issues are transformed to market, analysts are recommended aftermarket stabilization, and the market is created for the stocks.

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After 25 days, from the IPO, transformations to market competition commences. On the first day after the beginning of IPO trading, it is easier to buy a high number of stocks. There are few risks involved in buying stocks immediately after IPO. 

Before buying an IPO Stock, it is more important to review the business model of the company. A key point to consider is about the consistent profit or at least has a path to consistent profitability.

In Summary,

InvestorsDuration to wait
Large investorsCouple of days after IPO
Small investorsAt least after 150 days

Why do You Have to Wait That Long to Buy Stock After IPO?

The most important point to be noted is Securities and Exchange Commission or any other regulatory body did not make any mandatory rules regarding the lock-up periods. The company which is going to be public or which is required by investment banker has self-imposed it.

The main goal of a lock-up period is only to maintain high stock prices once the company goes public and also to stop flooding which is done by large investors which depress the stock prices in the initial stage. Compared to the public, insiders of companies own a high percentage of stock shares disproportionately. The consequence of this would impact the share price of the company drastically when it goes public.

To avoid this, a lock-up period is followed for at least 6 months. There is even more advantage of this lock period. It gives you more time to investigate the performance of stock. It may vary from the initial stage to the end of the lock-up period and if it does not meet your expectations, it also may be worth buying something else.

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But if the stock price does not vary and remains the same till the end of the lock-up period, it would be a sound investment. A scenario may also occur if the earning season coincides with the lock-up period, where the insiders of the company can still be prevented from selling the shares even after the expiration of the lock-up period. But this happens only when the insider can access the non-public information and the material.

Conclusion

People who are doing small investments should also consider the pros and cons significantly before buying the IPO stock. Though Purchasing IPO stocks contains risk, it may be significant. And the most important point to consider is, if the first-day pop of an IPO is good, expecting the same profit until the last is worthless.

Most of the companies enter into IPO without having proper knowledge which results in huge loss. Often New IPOs have less history compared to older ones, which may be lead to difficulty in assessing it. This affects the new individual investors the most. It is always good to limit your respective position on any individual stock to a few percent of your holdings.

References

  1. https://academic.oup.com/rfs/article-abstract/12/2/227/1592936
  2. https://www.sciencedirect.com/science/article/pii/S0929119917302183

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