Public companies use a secondary offering to sell new shares of stock on the market. If a stock you own issues a secondary offering, it can affect the stocks you already hold by decreasing your ownership share and changing the value. Stockholders in a company that issues a secondary offering should research the circumstances to see how it will affect the value of the company and the price of their shares.
Secondary Offering Basics
When a corporation goes public, it issues an initial public offering, in which it sells shares of the company stock on the open market and raises capital. Stockholders, in turn, are given a percentage of ownership of the company. Sometimes companies will use a secondary offering to sell more stock and raise additional funds. Of course, this reduces the percentage of corporate ownership that each share represents. Also, because there is a larger supply of stock on the market, a secondary offering can often push the stock's price downward.
After a secondary offering, the shares you own make up a lower percentage of the company. If a corporation makes a profit, it will sometimes distribute it back to shareholders in the form of a dividend payment. But if a company issues a secondary offering -- and thereby reduces your overall ownership percentages of the company -- any dividend payment you would receive would be a lower percentage of the profits. However, this might not be as significant if the company is able to use the funding from the secondary offering to boost profits.
Because companies often use secondary offerings when they need capital, it’s may be a sign that the company is performing poorly and likely already has seen drops in its share prices. In this environment, the announcement of a secondary offering will often create pessimism in the market, sending the share prices down even further. In some cases, a secondary offering is used to give a founder or major shareholders an opportunity to sell out their ownership stakes. These offerings don’t always lead to the shares being diluted. However, they can put downward pressure on the stock as market analysts will see the exit of a major shareholder as a reason to lose confidence in the company.
Research Reasons for Offering
If you hold stock in a company that announces a secondary offering, your first step should be to learn more about the offering. When new shares are issued and dilution is a concern, you should evaluate the share price. If it’s close to the market price, it could be a good sign, but if the secondary offering is for lower than the market price, it’s a sign the stock could be ready to drop. If the secondary offering is a sell-off for a major investor, research the shareholder’s relation to the company. If it’s an insider, they could see problems for the company, and it may be wise to monitor the stock closely or even sell your shares.
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