The Lockup Period
Q I read that shares of Beyond Meat were down because of its “IPO lockup period.” What’s that? — J.H., Los Angeles
A It’s common in initial public offerings (“IPOs,” when companies first issue stock to investors) that insiders who hold shares are not allowed to sell any for a set period of time after the IPO — typically between three and six months. That’s the lockup period, and it’s meant to keep share prices stable or rising. Stock prices often head south for a while once the lockup period expires and some insiders start selling.
In the case of Beyond Meat, when the lockup period ended, about 80% of the company’s shares became available for trading. The company posted strong third-quarter results the day before the expiration, but shares dropped around 20% upon expiration anyway.
It’s often wise to steer clear of IPOs for their first year or so, to give the shares time to settle down.
Q What does it mean if a company is described as growing too fast to be profitable? — D.L., Coventry, Rhode Island
A A company’s profits are simply what’s left after its expenses are subtracted from its revenue. But expenses are, to some degree, under the control of company management.
For example, if a company wants to grow briskly, it might spend as much as possible hiring more workers and advertising. It might even cut its prices to win customers from competitors. Such moves will shrink its profits and can lead to losses. Some companies will even borrow heavily to invest in growth. Trading profits for growth can work out well, for companies such as Amazon.com, or poorly, if it ends in bankruptcy.
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