You may be familiar with the phrase “initial public offering,” or IPO, when a new company makes its shares available on a public exchange. The term secondary offering can refer to a couple of things: One is when investors sell their IPO shares on the secondary market to other investors. Another is when companies seek to raise more cash in a follow-on offering some time after the IPO.
When companies seek to raise additional capital after an IPO through a secondary offering, there are two types: dilutive and non-dilutive. Secondary offerings can have a significant impact on stock prices, so it’s beneficial for investors to understand how they work. Let’s dive into the details.
What Are Offerings In Stock?
When a company begins selling shares of stocks, bonds, or other securities to the public, it’s called an offering.
Usually people talk about buying stocks during initial public offerings, or IPOs, but there are other types of offerings companies can make to raise cash.
A company may have later offerings, post-IPO, which are called seasoned offerings or follow-on public offerings (FPO) in which the company sells new shares on the market or by issuing a convertible note offering. These are low-interest notes that can be converted into shares, often within five to 10 years.
Any of these can also be called a secondary offering or secondary stock offering.
Companies may make these offerings if they need cash, are looking to expand their business, want to acquire another company — or their stock is performing well and they want to stoke investor demand with a limited additional supply of new shares.
Primary vs Secondary Offerings
The difference between primary and secondary offerings is pretty straightforward, but there are different types of secondary offerings.
A primary offering is to raise capital. Companies issue new shares to investors in exchange for cash that’s used to fund business operations, make acquisitions, and other corporate aims.
In a secondary stock offering, investors who own those IPO shares can buy and sell their shares directly from and to each other. Or a company may decide to issue new shares. Here’s what that can look like.
Recommended: Shares vs. Stocks: What’s the Difference?
What Is a Secondary Offering, What Are the Different Types?
There are a couple of different types of secondary offerings, so it’s important to distinguish between them.
The main definition of a secondary offering refers to investors who buy and sell IPO shares amongst each other. In this case, the cash is exchanged between investors, as noted above.
Sometimes a company needs to raise more capital and may hold what’s known as a follow-on, or seasoned equity offering. This is referred to as a type of secondary offering as well.
Sometimes, in this type of secondary offering, shareholders such as the CEO and founders sell a portion of their shares on the secondary market for private or personal reasons. If the shares are sold by individuals, the money goes to those sellers.
If the shares come from the company, the money raised from the sale goes to the company. There are two types of shares that can be offered here: dilutive and non-dilutive.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Types of Secondary Offerings
It’s important for investors to understand the difference between dilutive and non-dilutive shares as they can have different impacts on the value of the stock.
Dilutive Secondary Offerings
A dilutive offering involves the creation of additional shares by the company, which in turn reduces the amount of ownership that preexisting shareholders have. As the name implies, the offering has a dilutive effect. Investors often have a negative sentiment toward dilutive offerings.
The company’s board of directors must approve of the increase in floating stock shares. The float of a stock is the number of shares available for trade.
Non-Dilutive Secondary Offerings
With non-dilutive offerings, no additional shares are created. A non-dilutive offering is often made by major shareholders selling their existing shares. This doesn’t have any effect on the company itself, except perhaps the investor’s perception about why the shareholders are selling.
This type of offering can also be beneficial because it allows more individuals and institutions to invest, which can increase the stock’s liquidity since there are more people buying and selling.
Examples of Secondary Offerings
Many companies make secondary offerings following their IPOs.
Google made a secondary offering in 2005 after its IPO in 2004. During the IPO, the company had a share price of $85 and raised $2 billion. During the secondary offering, the share price was $295 and the company raised $4 billion.
Then there’s Rocket Fuel, a company that made a secondary offering of 5 million shares in 2013. Existing shareholders sold 3 million shares and the company sold 2 million, all at a price of $34 per share. Just one month after the secondary offering, the value of the shares had gone up nearly 30%, to $44.
Why Make a Secondary Offering?
Similar to an IPO, a secondary offering helps companies raise money so they can expand their operations. This can be a quick way for companies to raise significant funds fairly efficiently.
Companies may also hold a second offering between their IPO and the end of their stock’s lock-up period, which is a time when large shareholders are not allowed to sell shares. After the lock-up period, a stock’s price often falls when these shareholders sell off some of their shares. By holding a secondary offering before the end of the lock-up period, additional investors can benefit from the success of an IPO.
It’s important for investors to look into why a company is making a secondary offering before deciding whether to invest, as this can affect the price of the stock in both the short and long term.
How to Trade Secondary Offerings
Most companies that file secondary offerings choose to do so soon after the end of the lock-up period after their IPO. When a company wants to make a secondary offering, they file it for approval with the SEC.
Investors can find out about the latest secondary offerings in a few ways. The SEC has a database of secondary offerings called the EDGAR database, where investors can find out about them. Investors can also look to the NASDAQ list of secondary offerings made by companies listed on the NASDAQ stock exchange. Companies filing secondary offerings tend to get covered in the media and also put out press releases with details about the offering.
💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.
How Do Stock Prices React to a Secondary Offering?
The basic concept of supply and demand dictates that if there is more of something available, its price will likely decrease. This is sometimes what occurs during a secondary offering, but not always.
If more shares are created, the price of the shares may fall — especially with dilutive offerings because they can decrease the earnings per share of the stock.
The price of stocks can also decrease during a secondary offering because the company issues the offered shares at a discounted price to incentivize investors to buy. The decrease in value can last a while because any investors who buy-in at the discounted price can sell at a slight increase and make a profit.
If a company creates new shares and sells them at market value with a discount to account for the amount of dilution, this generally results in the least amount of price volatility.
Although a secondary offering often results in a decline in stock price, that isn’t always the case. Non-dilutive offerings are viewed more positively, as they don’t affect the stock’s earnings per share or shareholders’ amount of ownership. Also, it can be seen as a good sign for the long-term value of the stock if a company is investing in growth and acquisitions.
Many secondary offerings don’t have any restrictions, but some may require a lock-up period similar to an IPO, during which investors aren’t allowed to sell their shares.
For Investors, Green or Experienced
Now the difference between a primary offering and the different types of secondary offerings makes more sense. A primary offering is when a new company goes public and makes its shares available on a public exchange — this is part of how companies raise capital.
A secondary offering is when IPO investors subsequently sell their shares on the secondary market to other investors. In this case the company doesn’t issue new shares, and they don’t raise more cash from this type of secondary stock offering. However, companies can seek to raise more cash in a follow-on offering some time after the IPO — which is also called a secondary offering. There are two types, dilutive and non-dilutive secondary offerings, which can impact the stock price overall.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
FAQ
Is a secondary offering good for stock?
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.
What is the difference between a primary and secondary offering?
A primary offering is to raise capital, typically during an IPO. In a secondary offering, investors with IPO shares can trade their shares directly with each other. Or a company may decide to issue new shares in a follow-on offering to raise more cash.
Can you sell a secondary offering stock?
Yes, you can sell stock from a secondary offering, whether you’ve bought it from an IPO investor selling their shares, or from the company during a follow-on offering.
How do you sell on secondary?
To sell stock on a secondary market, shareholders need to find a buyer through whatever method they deem most efficient (there are platforms that can facilitate this), come to an agreement regarding price, and execute a trade.
What is the purpose of a secondary listing?
In general, the purpose of a secondary listing is to raise more capital, and to expand a customer’s investor base.
What are the risks of buying from a secondary market?
Buying from a secondary market means that an investor is purchasing securities from any public stock exchange. As such, the risks of buying on the secondary market are the same as buying any stock – there’s market risks, credit risks, and numerous other risks baked into the securities.
What are the benefits of secondary markets to investors?
Secondary markets give investors access to publicly traded securities, and for shareholders, open up liquidity for their holdings, as there’s a market full of potential buyers. Overall, secondary markets facilitate trading and thus, create liquidity.
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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
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