We've seen it time and time again. Hot IPOs that finish up 300% or more in their first day of trading. But much to their chagrin, insiders can't dump their highflying shares right away. They must sit on their hands for six months (though some lock-up periods are shorter), until trading restrictions expire. This is known as the lock-up period in Wall Street parlance.
That six-month period bears close watching by investors. A post-lock-up sell-off can bring a lot of stock onto the market, which can ultimately drive a company's share price straight into the ground. Conversely, this can present a buying opportunity for investors, but they should take into account the proportion of a company's total shares held by insiders.
But insiders don't always rush to the exits as soon as they can.
Just look at online auctioneer eBay Inc. (NASDAQ:EBAY - news) . Insiders could have dumped 29 million shares on the market on January 29, 1999 -- the end of their unusually short, 120-day lock-out period. With a total of only about 3.5 million shares on the market, many feared the worst for eBay's stock price.
Investors in eBay had seen a towering gain from the IPO price of $18.00 on September 23,1998 to a closing price of $97.54 the day before the lock-up ended. If insiders had decided to cash out, individual investors faced the risk of their gains disappearing in a matter of hours.
Keep an eye on the following companies, as they have lock-up expirations coming up over the next three to four months: Fox Entertainment Group (NYSE:FOX - news) , expiring in May, UBID Inc. (NASDAQ:UBID - news) expiring in June, Concur Technologies (NASDAQ:CNQR - news) expiring in June and Marketwatch.com (NASDAQ:MKTW - news) expiring in July.