Secondary offerings can be searched using the SEC’s EDGAR database, and the NASDAQ keeps an updated list of secondary offerings by companies trading on that exchange. Often, secondary offerings are also highlighted in stock news feeds through company press releases and offerings by major companies will receive significant financial news coverage.
Full Answer
What to do when a company offers secondary stock?
How to handle secondary offerings When a company whose stock you own does a secondary offering, your first move should be to figure out which type of offering is involved.
What is a secondary offering of shares called?
Shareholders and corporations sell secondary offerings on the secondary market, otherwise known as the stock market, i.e., the New York Stock Exchange and the NASDAQ. It is called a secondary offering because the transaction exchanges shares after the company’s first public distribution.
How do I find out about secondary offerings?
Secondary offerings must be filed with the SEC, which means that it’s relatively straightforward for investors to find out about them. Secondary offerings can be searched using the SEC’s EDGAR database, and the NASDAQ keeps an updated list of secondary offerings by companies trading on that exchange.
How long does it take for a secondary offering to market?
Secondary offerings are normally marketed within a few days rather than a few weeks, which is common for IPOs. There are instances when secondary offerings can have a big impact on investor sentiment, not to mention a company's share prices.
Is secondary offering public?
A secondary offering occurs when an investor sells their shares to the public on the secondary market after an initial public offering (IPO). Proceeds from an investor's secondary offering go directly into an investor's pockets rather than to the company.
What happens to stock price secondary offering?
When a public company increases the number of shares issued, or shares outstanding, through a secondary offering, it generally has a negative effect on a stock's price and original investors' sentiment.
Do secondary offerings lower stock price?
Unlike IPOs, which do not have a trading history, Secondary Offerings often have years of trading history and financial records for investors to make an informed decision. Secondary Offerings can result in a lower trading price the next day.
Is a secondary stock offering good?
A secondary stock offering can be good for the stock price, particularly if the shares offered are non-dilutive. Dilutive shares, which reduce the value of existing shares, may not be good for the stock price in the short-term — although prices may recover.
Why do a secondary offering?
Companies use secondary offerings for various reasons, to fund new projects, complete acquisitions or meet operating expenses. Shareholders and corporations sell secondary offerings on the secondary market, otherwise known as the stock market, i.e., the New York Stock Exchange and the NASDAQ.
What happens to stock price when new shares are issued?
In the stock market, when the number of shares available for trading increases as a result of management's decision to issue new shares, the stock price will usually fall.
What happens to a stock when an offering closes?
Public Offering Closing means the date on which the sale and purchase of the shares of Common Stock sold in the Public Offering is consummated (exclusive of the shares included in the Underwriter Option).
Do stock offering dilute existing shareholders?
Stock dilution occurs when a company's action increases the number of outstanding shares and therefore reduces the ownership percentage of existing shareholders.
Is follow-on offering good or bad?
Follow-on offerings can also cause the stock's value to fall because there are more outstanding shares, but the firm's market capitalization is roughly the same. These follow-on offerings can lead to volatility at the time of the deal.
Should I buy a stock after offering?
Bottom line: Secondary stock offerings are a net positive, and a catalyst for share price growth. A secondary offering alone won't convince investors to buy, but with the right stock, it can be just the thing to put it over the top.
What is the difference between a follow-on offering and a secondary offering?
A primary follow-on offering is a direct sale of a company's shares from the company that are newly issued. A secondary follow-on offering is a public resale of existing shares from current stockholders. A primary offering is dilutive while a secondary offering is non-dilutive.
What does a shelf offering do to stock price?
A shelf offering provides an issuing company with tight control over the process of offering new shares. It allows the company to control the shares' price by allowing the investment to manage the supply of its security in the market.
What is secondary offering?
What Is a Secondary Offering? A secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO). There are two types of secondary offerings.
Why do companies do secondary offerings?
In some cases, the company might simply need to raise capital to finance its debt or make acquisitions. In others, the company's investors might be interested in an offering to cash out of their holdings.
What is an IPO?
An initial public offering (IPO) is considered a primary offering of shares to the public. Sometimes, a company will decide to raise additional equity capital through the creation and sale of more shares in a secondary offering. Companies perform secondary offerings for a variety of reasons. In some cases, the company might simply need ...
What is a non-dilutive secondary offering?
A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.
Why is a non-dilutive secondary offering not a dilute offering?
A non-dilutive secondary offering does not dilute shares held by existing shareholders because no new shares are created. The issuing company might not benefit at all because the shares are offered for sale by private shareholders, such as directors or other insiders (like venture capitalists) looking to diversify their holdings.
What happens when the number of outstanding shares increases?
When the number of outstanding shares increases, this causes the dilution of per-share earnings. The resulting influx of cash is helpful in achieving the longer-term goals of a company or it can be used to pay off debt or finance expansion. Some shareholders' shorter-term horizons may not view the event as a positive.
When did Mountain View IPO?
The Mountain View company's initial public offering (IPO) was conducted in 2004 using the Dutch Auction method. It raised approximately $2 billion at a price of $85, the lower end of its estimates. In contrast, the follow-on offering conducted in 2005 raised $4 billion at $295, the company's share price a year later.
What is secondary offering?
In finance, a secondary offering is when a large number of shares of a public company. Private vs Public Company The main difference between a private vs public company is that the shares of a public company are traded on a stock exchange, while a private company's shares are not. are sold from one investor to another on the secondary market.
What is a follow on offering?
In a follow-on offering (sometimes called a “seasoned” equity offering), a company is returning to the capital markets, selling new shares to raise more money. The first time a company sells its share to the public is called an Initial Public Offering (IPO)#N#Initial Public Offering (IPO) An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors). Learn what an IPO is#N#. All subsequent offerings following the IPO are called follow-on or seasoned offerings.
What is an IPO?
Initial Public Offering (IPO) An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors). Learn what an IPO is.
What is secondary market capital?
In the secondary market (as shown above), investors buy and sell shares of publicly traded companies between each other, directly. No new shares are issued by the company, and the company doesn’t receive any additional capital. Capital Capital is anything that increases one’s ability to generate value.
Why did Zuckerberg sell his shares?
The reported reason for him selling the shares was to raise money for his own personal tax bill. In addition to Zuckerberg’s secondary offering, the company also issued some new shares to the public, which did net them some proceeds for corporate purposes.
What is public securities?
Public Securities Public securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based. into the market. Image: CFI’s Free Intro to Corporate Finance Course.
What happens when a company increases the number of shares issued?
When a public company increases the number of shares issued, or shares outstanding, through a secondary offering , it generally has a negative effect on a stock's price and original investors' sentiment.
How does a company go public?
First, a company goes public with an initial public offering (IPO) of stock. For example, XYZ Inc. has a successful IPO and raises $1 million by issuing 100,000 shares. These are purchased by a few dozen investors who are now the owners, or shareholders, of the company.
Does dilution hurt stock price?
And the prospect of share dilution will generally hurt a company's stock price. That said, there are ways original investors could possibly protect themselves against dilution, for example, with contractual provisions that restrict a company's power to reduce an investor's stake after later funding rounds occur.
What Is a Secondary Offering?
A secondary offering is the offering for sale of a public company’s shares by an investor or the creation, by the company, of new shares and then the offering of those newly created shares for sale to the public. Companies use secondary offerings for various reasons, to fund new projects, complete acquisitions or meet operating expenses.
Secondary Offering Example
One notable example of a secondary offering occurred in 2013 involving social media giant Facebook and its CEO. The company and Mark Zuckerberg opened up an opportunity for investors to own some of the company’s stock following its May 2012 IPO. Between the company and Zuckerberg, a combined 70 million shares were sold on the market.
Primary Offering vs. Second Offering
A primary offering comes into play when a private company goes public on the stock market. When the business first puts out stock for sale to the public, it is called an IPO. New or growing companies do this to help raise capital for future business operations.
The Takeaway
Secondary offerings can be dilutive or non-dilutive. Regarding the former variety, publicly traded corporations make secondary offerings to fund acquisitions, pay for new ventures or cover operating expenses. Sometimes secondary offerings are called follow-on offerings.
Tips for Investors
You may be new to trading or have years of experience. Regardless, it is always good to think about your portfolio critically. If you want to improve your investment strategy or revise your asset allocation, consider speaking to a financial advisor. They can address your needs with your goals in mind, and finding one is simple.
Why are secondary offerings not the same?
Sometimes, the company needs to raise more capital in order to finance operations, pay down debt, make an acquisition, or spend on other needs.
What happens when you increase your stock?
With an increase in shares outstanding, the stock position you own represents less of the overall company, and you'll get a proportionately smaller share of the company's profits going forward. The trade-off, though, is that the company gets to keep the cash raised from the offering, which increases its overall value.
Do big blocks of shares dilute existing shareholders?
Although the big blocks of shares cause temporary selling pressure, the offerings don't dilute existing shareholders and have no impact whatsoever on the fundamentals of the business. What can be problematic, though, is when corporate insiders sell out.
Primary vs Secondary Market
- In the primary market, companies issue new shares to investors in exchange for cash. The proceeds from such an offering are used to fund the business, make acquisitions, and for general corporate purposes. In the secondary market (as shown above), investors buy and sell shares of publicly traded companies between each other, directly. No new shares are issued by the compa…
Secondary Offering Example
- An interesting secondary offering example occurred in 2013 when Facebook CEO Mark Zuckerberg sold approximately 41 million of his own shares to other investors. Since he was selling his personal shares, he received the proceeds directly from investors, instead of the company receiving them. The reported reason for him selling the shares was to raise money for …
Secondary Offering vs Follow-On Offering
- In a follow-on offering (sometimes called a “seasoned” equity offering), a company is returning to the capital markets, selling new shares to raise more money. The first time a company sells its share to the public is called an Initial Public Offering (IPO). All subsequent offerings following the IPO are called follow-on or seasoned offerings.
Summary of Key Concepts
- Initial Public Offering= the first time a company issues shares to the public Follow-on Offering= any subsequent offering following an IPO (can include new shares and secondary issuance) Secondary Offering= when shares are bought/sold directly between investors (no new shares are issued)
Additional Resources
- Thank you for reading this guide to better understand how companies and investors buy and sell shares from each other. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certificationdesigned to transform anyone into a world-class financial analyst. To help you advance your career, these additional CFI resources will be helpful: 1. The IPO proce…
Going Public
The Secondary Offering and Dilution
- Subsequently, things are looking up for XYZ, which prompts management to raise more equity capitalthrough a secondary offering in order to secure the necessary capital for operations. That secondary offering is successful. In this instance, the company only issues 50,000 shares, which produces additional equity of $50,000. The company then goes on ...
How Investor Sentiment Is Affected
- While an absolute increase in a company's net income is a welcome event, investors focus on what each share of their investment is producing. An increase in a company's capital base dilutes the company's earnings because those earnings are spread among a greater number of shareholders. Without a strong case for maintaining and/or boosting EPS, investor sentiment fo…
The Bottom Line
- While IPOs are very exciting, they may not always be the best way for an investor to increase their stock market wealth. When researching investment opportunities, always pay attention to capitalization and dilution potential, and keep your eye on a company's EPS.