What is a Secondary Offering?
When a new firm makes its shares accessible on a public exchange, it is known as an “initial public offering,” or IPO. When investors sell their IPO shares to other investors on the secondary market, this is referred to as a secondary offering. Another is when businesses look to raise additional funds through a follow-on offering sometime after the initial public offering.
A secondary offering in the world of finance refers to the sale of several shares of a publicly traded firm from one investorto another. The public firm does not receive any cash or issue any additional shares in such a scenario. Instead, the investors deal directly with one another to acquire and sell shares. It is distinct from a primary offering, in which a corporation releases fresh stock onto the market.
In the years that follow an IPO, a secondary offering happens in the secondary market. Depending on the parties engaged in the transaction, it may either involve the sale of current shares or the issuance of new shares.
TYPES OF SECONDARY OFFERING
A secondary offering can be categorized into two dilutions of ownership.
Non-dilutive secondary offerings
A significant shareholder selling already issued equity shares is an example of a non-dilutive secondary offering. The business neither receives cash payments nor issues equity shares. In the secondary market, the transaction is carried out between two parties, a buyer and a seller.
After the post-IPO lock-up period expires, a non-dilutive secondary offering typically takes place. Although this kind of secondary offering does not affect the total number of outstanding shares of the firm, it could raise the float and enhance the stock’s liquidity.
Dilutive secondary offerings
Another name for a dilutive secondary offering is a follow-on offering. In that new shares are issued, and the company obtains profits from the sale, it resembles an IPO in specific ways.
The capital, number of shares outstanding, and company float rise as a result of a dilutive secondary offering, diluting the stake of current shareholders. The corporation may utilize the issue’s proceeds to pay down debt for investments, operating capital, or other comparable things.
AN ILLUSTRATION OF A SECONDARY OFFERING
After its 2004 IPO, Google conducted a secondary offering in 2005. The company raised $2 billion and had an IPO share price of $85 during that time. The share price was $295 during the secondary offering, and the business raised $4 billion.
Then there is Rocket Fuel, a business that issued 5 million shares in a secondary offering in 2013. For $34 per share, the industry sold 2 million shares, 3 million of which were sold by existing owners. Following the secondary offering, the shares’ value increased by almost 30% to $44 in just one month.
Understanding secondary offerings require being able to tell them apart from initial public offerings (IPO). New equity shares are issued in an IPO to satisfy a company’s capital needs.
It would help if you were cautious with secondary offers as investors. If you anticipate that a company you have invested in or plan to invest in will soon make a secondary offering, you should sell your investment or decide not to. Shortly, you should liquidate your stake or refrain from doing so. In my following research, I will discuss another offering in stocks which is called a primary offering. In addition, the pros and cons of both primary vs. secondary offerings.