What is the purpose of a lock-up period in an IPO?

The purpose of a lock-up period in an Initial Public Offering (IPO) primarily revolves around stabilizing the stock price in the early days of trading. During the lock-up period, major shareholders—including company executives, employees, and insiders—are restricted from selling their shares for a predetermined amount of time, usually ranging from 90 to 180 days. This restriction helps to prevent a sudden influx of shares hitting the market right after the IPO, which could lead to increased volatility and a potential decline in stock price.

By limiting the supply of shares available for sale, the lock-up period aims to create a more stable trading environment, allowing the market to assess the company's performance without the immediate pressure of insiders liquidating their holdings. This can help foster investor confidence in the new stock offering.

This option correctly captures the essence of a lock-up period's role in supporting the stability of a company's stock price during its initial public trading phase, contrasting other choices that do not accurately reflect this primary objective.