Lock-in period - Financial definition
Concise definition of the term lock-in period
A lock-in period in finance refers to a predetermined period during which investors cannot sell or redeem their investments. It is commonly applied to certain types of investment products like mutual funds, fixed deposits, or employee stock options.
Comprehensive definition of the term lock-in period
The lock-in period is designed to prevent early withdrawals, ensuring stability and long-term capital retention within the investment vehicle. For example, in mutual funds, a lock-in period might be three years, during which investors are not allowed to sell their units, ensuring the fund manager has stable capital to invest.
In employee stock options, a lock-in period can prevent employees from selling shares immediately after receiving them, aligning their interests with the company's long-term performance. Additionally, during an initial public offering (IPO), insiders and early investors are often subject to a lock-in period to prevent them from selling large quantities of stock right after the company goes public, which could negatively impact the stock price. This practice helps in maintaining market stability and investor confidence.