Secondary Offerings and Rights Offerings

After a company goes public, it may sell more shares later. These sales are called secondary offerings, follow on offerings or seasoned equity offerings. Sometimes the company issues new shares to raise money, which dilutes existing shareholders. Other times, existing shareholders such as founders or private equity firms sell their stakes, with no new money going to the company. Either way, new supply of shares often pushes the price down, at least in the short term, so traders pay close attention.

Types of secondary offerings#

Dilution#

dilution % = new shares issued / (existing shares + new shares)

Pricing and discounts#

Secondary offerings are usually priced at a discount to the last closing price, often 2% to 5% for large, liquid companies and more for smaller ones, to attract buyers for a large block of stock. Many offerings are launched after the market closes and priced overnight, so the stock often opens lower the next day.

Why companies issue shares#

• Fund growth: new projects, research, expansion.
• Strengthen the balance sheet: repay debt or survive losses.
• Fund acquisitions. See Mergers and Acquisitions.
• Take advantage of a high share price: issuing stock when it is expensive is cheap capital.

Research has found that companies issuing new equity tend to underperform over the following years on average, possibly because managers sell shares when they believe they are overvalued. This "new issues puzzle" mirrors the observation that companies buying back shares have tended to outperform. See Buybacks.

How stocks react#

Supply overhang#

When a large holder is known to want to sell, the possibility of future offerings can weigh on the price. Once the sale is completed, the overhang disappears, and the stock sometimes recovers. Lockup expirations after IPOs create similar overhangs. See IPOs.

At the market programmes#

ATM programmes let companies sell shares gradually at market prices over time. They are common among real estate investment trusts, biotech companies and, more recently, some companies raising money to buy Bitcoin. The steady supply can weigh on prices and dilute holders continuously.

Trading around offerings#

1. Watch for filings such as shelf registrations, which allow companies to issue shares quickly.
2. Expect weakness around the offering date, especially for small companies.
3. Look at the offering price as a possible support level once the deal is done.
4. Consider use of proceeds: growth investment vs funding losses.

Frequently asked questions#

What is a secondary offering?#

A sale of shares after a company's IPO, either new shares issued by the company or existing shares sold by current holders.

Do secondary offerings dilute shareholders?#

Only primary offerings, where the company issues new shares, dilute existing holders; sales by existing shareholders do not change share count.

Why do stocks fall after secondary offerings?#

Because offerings add supply, are priced at a discount and can signal that management or insiders think the stock is fully valued.

Next, learn about companies buying back their shares in Buybacks.