The close period is the amount of time that passes between the final preparation of a company’s balance sheet and the sharing of that data with the general public. While the length of this period may vary, many businesses wait two months after completing the balance sheet and making the formal announcement of the results. During this time frame, many companies impose restrictions on the trading activity of directors and other insiders that are associated with the business.
There are a number of reasons why the use of a close period is a beneficial business practice. The most obvious is that by delaying the announcements regarding the company’s finances for the recently completed year or quarter, it is possible to investigate the reasons for those results. In the event of a downturn in profits from the previous year, there is time to identify why that loss occurred, and be prepared to announce changes in operations or policies that will help to reverse the loss. Should the company experience an increase in profits, there is time to identify the root causes for the higher profits and also develop a plan of action to capitalize on that growth.
During the close period, companies often choose to limit any type of announcements that have to do with the price of the goods or services produced. While this is not often a requirement in terms of any type of governmental regulations, doing so is often considered a wise practice that helps to maintain the current status quo. For investors, the company may choose to issue a trading statement just before the beginning of the close period, as a means of providing them with the most up to date information available.
Once the close period has begun, nobody with an inside knowledge of the company is allowed to buy or sell shares of company stock. Since insiders have access to information that has not yet been made available to the general public, using that knowledge to make trades would create an unfair advantage. In nations where insider trading is illegal, refraining from trading during the close period also minimizes the potential of criminal charges and adverse publicity for the corporation.
Typically, a company will release little to no financial information during the close period. Exceptions do sometimes occur, normally owing to circumstances that are out of the ordinary and could not have been anticipated by the directors. For example, if a natural disaster of some type takes place, and has a direct bearing on the financial stability of the company, the decision to release at least some financial information may be necessary in order to maintain consumer confidence, as well as calm the fears of investors.