Escrowed Share: Meaning, Accounting, How Escrow Accounts Work

In the world of finance, an escrowed share is a type of security that is held in an escrow account. This means that the shares are not immediately available for trading, but are instead held in a neutral third-party account. The purpose of this arrangement is to protect the investors in case the issuer of the securities becomes insolvent.

In this article, we will be digging deep into the world of escrowed shares. We will look at its definition, examples, and when it is used. Learning how escrow shares work is important for anyone looking to invest in shares. So if you are interested in learning more about this topic, then read on.

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Table of Contents

Definition of Escrowed Shares

Escrowed shares are defined as securities that are held in an escrow account also known as a trust account. An escrow is a procedure in which money or a financial asset is held by a third party on behalf of two other parties.

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The funds or assets in escrow are kept there and not released until all of the terms of the agreement have been fulfilled. Escrow protects a trade by having a third party hold assets, which prevents one party from having to pursue the other for money or items.

In stock investments, the equity shares are kept in escrow, often in a holding account, until all conditions have been met. A stock held in escrow is mostly owned by the shareholder. However, the shareholder may not be able to sell the stock right away or they may not have complete access to selling the shares.

Examples of Escrowed Shares

There are a few examples of escrowed shares that you should be aware of. One example is when a company goes public and sells its shares to the public for the first time. The company will often place its shares in an escrow account until the IPO (initial public offering) date. This is done to ensure that the company meets all of the listing requirements on the stock exchange.

Another example of escrowed shares is when a company is bought out by another company. The shares of the company being bought out are usually placed in an escrow account until the transaction is complete. This protects the shareholders of the company from being bought out in case the deal falls through.

When Escrowed Shares Are Used

There are a few instances when escrowed shares are used.

One instance is when a company goes public. As we mentioned before, the company will often place its shares in an escrow account until the IPO date. This is done to ensure that the company meets all of the listing requirements on the stock exchange.

Another instance where escrowed shares are used is when a company is bought out by another company. In this case, the shares of the company being bought out are placed in an escrow account. This is done to ensure that the shareholders of the company being bought out receive the agreed-upon price for their shares. The shares are released from escrow once the transaction is complete.

Conclusion

In this article, we have talked about escrowed shares. We looked at its definition, examples, and when it is used. We hope that this article has helped you understand how escrow works in the world of finance. Thank you for reading.