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Secondary offerings explained

Kyle DennisKyle Dennis ·

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.

Source: TradingView

Final thoughts

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.

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  Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.  

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