What Is Locked In?
Let me explain what 'locked in' means in the world of investing. It's a situation where you're unwilling or unable to trade a security because of regulations, taxes, or penalties tied to it. This often happens with investment vehicles like retirement plans, where you can't access the funds before a set retirement date without facing consequences.
Key Takeaways
You're considered 'locked in' as an investor when regulations, taxes, or penalties stop you from trading a security profitably or legally. This applies to stocks, options, and warrants in employee incentive programs, which typically have mandatory vesting periods. Shares from initial public offerings are often locked in to stop company insiders from getting an unfair edge in trading.
Understanding Locked In
If the value of your stocks rises, you'll face capital-gains tax as a shareholder, though there are exceptions. To cut down on that tax, you might shelter those gains in a retirement account. You're locked in here because pulling out any part of the investment early means getting taxed at a higher rate than if you'd waited until maturity.
Locked-in securities also cover stock, options, and warrants given to employees through incentive programs that build company loyalty and push for better performance. These programs usually have mandatory vesting periods where you've been granted the securities but can't exercise them yet—meaning you can't turn them into cash or stock.
You typically have to hold such shares or warrants for several years before exercising them. There might be phases in this locked-in period where, at set intervals, the shares shift in ownership or tax status.
Even after converting options or warrants into stock and granting them to you as an employee, there could be another holding period before selling. In these cases, you often get the options at the market price when granted, which might be a big discount compared to the price when exercised. Depending on your selling timing, the proceeds could be taxed at a lower rate than originally set.
Reasons for Locked-In Shares
When a company goes public with an initial public offering (IPO), issuing stock to the public for the first time, there are often lock-in rules on shares held by founders, promoters, and early backers. This stops these insiders from selling or transferring shares during the IPO window, as they might have inside info that regular investors lack.
This lock-in period could last 90 days or even years after the IPO. It reduces the chance of market manipulation by limiting insider trades.
Executives and senior managers might receive locked-in shares as compensation, not released for a while after granting, to motivate top performance.
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