Secondary offerings are a way for a company to raise capital to grow and expand their operations. Where an initial public offering (IPO) marks the first time a company sells shares to the public, a secondary offering is — as the name implies — the issuance of more shares of stock, a move that can help the company’s finances while diluting its stock.
Secondary offering explained
When a company already has stock trading on the open market, the issuance of new stock for public sale is known as a secondary public offering or SPO. Generally, companies issuing a secondary public offering are looking to generate capital in order to expand operations or refinance debts.
The capital raised from a secondary public offering goes directly to the company, through the underwriter, who takes a fee for conducting the SPO.
Secondary public offerings increase the number of shares outstanding, spreading the market capitalization across a higher number of shares. Consequently, this affects earnings per share (EPS), as well as shareholders’ ownership position. Thus, secondary public offerings are seen as a dilutive measure and, because investors don’t love dilution, you frequently see traders short stocks that announce an SPO.
Here’s an example in action: HTG Molecular Diagnostics (HTGM) announced a secondary public offering in late March 2017, with the company looking to raise a total of $75 million in gross proceeds. Check out what happened after the announcement.
Be wary — especially if you are a short-term investor — if you’re long a stock that announces a secondary public offering. This will dilute your ownership, and the stock could potentially fall and see its price depressed for the foreseeable future after the announcement.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.