IPO Lock-Up Period

When a company goes public, its insiders can't sell their shares for a certain period of time. This is called the lock-up period. It typically runs for 90 days to a year and offers outside investors some measure of protection. If the newly public firm has some skeletons in its closet, insiders who know about them can't act on their "inside" knowledge and quickly sell shares before the public learns the bad news. Some companies set extra-long lock-up periods to show their faith in the company and inspire confidence in public shareholders.

So, if you've been checking for insider sales and haven't seen any for a newly come-public company you have doubts about, don't take that as a necessarily good sign. The insiders may simply be preparing to unload after the lock-up period.

In general, your friends at the Fool recommend investors steer clear of IPOs (initial public offerings), or at least think twice before investing in them. IPO stocks don't necessarily fare well in their first year or so, and you can often do better by focusing on firms with more established track records.

For more information on IPOs and how they work, read The ABCs of IPOs and our IPO FAQ.

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