Locked In

"Locked in" is a phrase that describes a situation wherein an investor is unwilling or unable to exit a position because of the regulations, taxes or penalties associated with doing so. This may be an investment vehicle, such as a retirement plan, that cannot be accessed until a specified retirement date.

If there is an increase in value of stocks held by an individual, the shareholder will be subject to pay a capital gains tax (with some exceptions). To reduce the tax burden, an investor could shelter these gains in a defined retirement account. The individual is considered locked in because if a portion of this investment is withdrawn prior to maturity, the owner will be taxed at a higher rate than if he or she had waited.

Locked in shares can describe stock, options, and warrants offered to employees under incentive programs that have a required vesting period. Typically, such shares or warrants must be held for several years before they can be exercised. There may be phases of the locked-in period wherein, over certain predetermined intervals, the shares attain a new status for ownership and taxation. Even after options or warrants have been converted into stock and granted to an employee, there may be another holding period before they can sell those shares. In such instances, the employees usually receive the options at the market price at the time they were granted, which may represent a deep discount compared with the current market price when they are exercised. Furthermore, depending on when the stock is sold, the proceeds might be taxed at a lower rate than they would have initially required.

When a company initiates an initial public offering, there may be locked-in stipulations on shares held by founders, promoters, and other early backers of the company. This is to prohibit these people, as insiders within the company, from selling or transferring shares during the IPO period. This period might last 90 days or even several years from the time of the public offering. As insiders, founders and other early shareholders can naturally be privy to information about the company that could be used for an unfair advantage if they were permitted to trade those shares during an IPO. A locked-in period mitigates the possibility of such manipulation by restricting their trades.

Executives and senior management might also be granted compensation through locked in shares that would not be released for a period of time, as a form of encouragement for superior performance leading the company.