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May 25, 2006

Process of an IPO

You see, when any company goes public, only a percentage of the company’s stock is offered for sale, also known as the float. The rest is held and owned by underwriters, company officers and other insiders.

By contractual obligation, insiders and underwriters can’t sell their stock for a period of time… usually six months to a year from the date of the IPO. This is commonly referred to as the lockup period, and it’s set up to ensure that insiders cannot profit from the early trading frenzy generated by an IPO.

It provides stability because insiders cannot simply dump their shares. Once the lockup period expires, anything goes, and insiders are allowed to sell their shares.

If an insider has realized a significant gain on his investment, he may cash out. And in many cases, insiders cash in and flood the market with shares, forcing the stock price lower.

Ordinary shareholders, unfamiliar with the unlock practice, are completely baffled. Share prices are dropping like a cement boot in the East River and they don’t know why. Lucky for us, they panic and dump their shares at a loss, only adding to the glut -- and our profit opportunities.

Todd M. Schoenberger and Ian Cooper
Editors, Red Zone Network

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