Posted on 26 May 2012.
Stocks that have completed the Initial Public Offering (IPO) process and trade as a recent IPO trade in uncharted territory, since they have yet to establish a trading range. New information that comes out about a company after a recent IPO can affect a company’s stock price in the weeks and months after an IPO. There are important dates that must be understood when trading a recent IPO, since the share price can be affected either positively or negatively on these dates.
The two most important dates to keep track of when trading or investing in a recent IPO are the end of the “quiet period” and the end of the “lockup period”. The end of the quiet period is when a company can start releasing forward looking statements and analysts can initiate buy, sell, or hold coverage. The quiet period for a recent IPO starts when the United States Securities and Exchange Commission (SEC) declares an IPO registration statement effective, and is in effect usually for 90 days from that point. The end of the lockup period, which is usually 90 to 180 days after a recent IPO, is when company insiders and large shareholders can sell shares they hold in the company.
While recent IPOs do not trade exactly alike, due to the large number of variables that can affect the price that stocks trade at, there is a typical trading pattern for a recent IPO that is worth taking note of for recent IPO trading opportunities.
It is not uncommon for a recent IPO to gap open once the IPO has been completed and the stock is available to buy on public stock markets. Buying a recent just after it opens for public trading is a very risky proposition. The typical trading pattern for most recent IPOs is to drift lower after this initial pop, as the stock market loses interest in the stock and unrestricted stockholders that are allotted IPO shares sell to book a quick profit. This is when it is important to know the end of the quiet period for a recent IPO stock. Because, it is not uncommon for a stock from a recent IPO to settle down into a trough after the initial post-IPO pop, and then move a few percentage points higher once the IPO quiet period is over, when analysts initiate coverage with buy recommendations and the company starts issuing forward looking statements. This is known as an IPO quiet period play.
After the IPO quiet period has passed, the next important date to keep in mind regarding a recent IPO is the end of the lockup period. Once insiders and larger shareholders are free to sell shares at the end of the lockup period, they typically put downward on a stock’s share price for a few weeks after the end of the lockup period, as they sell shares and increase the publicly traded float. The trading strategy for trading the end of the lockup period for a recent IPO is to either sell a long position ahead of this date or to initiate a short position ahead of this date, and to cover the short position for a profit, if the stock falls in price.
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