Secondary Offerings – What They Are & How They Work

Secondary Offerings

Most traders are aware of initial public offerings, but few fully understand secondary offerings.

If you have been trading for awhile, you’ve likely seen their impact.

It’s a typical sequence as shares in a stock spike up strong one day and then collapse in the post-market hours on news of a secondary offering. Traders are often left holding the bag buying into the run up expecting a big price gap up only to get smoked as the company releases news on a secondary. Ouch!

Stock Dilution Falling Share Prices

What is a Secondary Offering?

A secondary offering is another opportunity for the underlying public company to raise cash by offering new shares either to the public or to institutions. The stock price tends to fall upon announcement of the secondary since more dilution is expected with a larger float.

Secondary Offering

How Does a Company File a Secondary Offering?

A public company must file with the SEC for a secondary offering. The securities in the secondary can be stock but also include other types of securities including bonds. You can find the details on secondary offerings utilizing the SEC’s EDGAR database and NASDAQ’s listing of offerings.

Secondary Offering vs. IPO

A secondary offering can only be offered by companies who have already gone through the IPO process. In other words, these offerings are limited to publicly traded companies. That’s why it’s called a “secondary” offering which comes after the “initial” public offering. 

Secondary Offering vs IPO

Types of Secondary Offerings

There are several types of secondary offerings. 

A Company can file for either a dilutive secondary offering in which it sells new shares or a non-dilutive where existing shareholders sell their shares which does not increase the float.

Dilutive Offerings

A dilutive offering adds more shares to the existing float which then lowers the EPS as a result. The market capitalization hasn’t changed but the value per share changes due to the additional shares. It’s like a large pizza with 10 slices that is cut into 20 pieces. The size of the large pizza hasn’t changed, but the size of each piece has been cut in half. 

Dilutive vs Non Dilutive Offering

Shelf Offering  

A shelf offering can be a combination of securities including stocks and bonds. Shelf offerings are usually dilutive but not immediately. They can start off as a bond and then convert to shares at specific triggers, thus the convertible bond. 

What Traders Need to Know About Secondary Offerings

Be Aware of Secondary Offerings

Keep track of news related to offerings. Offerings can often kill small cap momentum runs like the example at the beginning of this article. Small caps are notorious for running up double and triple digits before announcing a secondary offering that pummels shares back down. This is because a high share price will enable more proceeds for the company.

Consider the Price and Size of the Offering

Once a company announces its secondary offering, it’s a good idea to check the filing on EDGAR and to analyze whether the sell-off is an overreaction. How dilutive is the offering? What percentage of the float is being added? Is the company selling tons of shares below market price?

Small vs Big Secondary Offerings

If the offering is priced much lower than where shares are trading, then immediately kick back and watch the offer price as a potential support. If shares are priced higher than where the stock is currently trading, then consider trying to find a bottom reversal area to trade.

You may also consider the purpose of the offering. If the purpose is for an acquisition, new projects, or for investments that are immediately accretive to earnings, then it may be fruitful to look for a bottom reversal. If the secondary is to pay off debt, then you may want to wait it out a little longer.

Consider the Terms of the Offering

As you do your research, make sure to read about the terms of the offering. Is there a lock-up period? If so, then mark the date on your calendar to consider as a reversal day and potential selling into that day. Make sure to note if there are any other stipulations.

Consider the Market’s Reaction

Secondary offerings are usually red flags especially when they occur after a huge run up in shares. Even if the offering is good for the business, it may not be good for the stock. In most cases, the stock will sell off immediately on the announcement of the secondary. Keep in mind that a company can announce it but not provide details until later. Be careful jumping into stocks that have yet to release the terms (IE: pricing). 

Stock Dilution After Spike In Share Prices

Beware of Serial Diluters

Some companies have a habitual tendency to implement secondary offerings to raise capital. Be very weary of these companies especially if revenues are small or non-existent. Junior mining and exploration companies are notorious for this as well as the recent “meme stocks”.

Ask yourself some questions. Does the company have a history of diluting shareholders? Do they continue to burn through cash and issue new shares? 

Serial Diluters

Stay away from companies that historically dilute their shares. It’s a good idea to check the outstanding share history and whether it’s been expanding on an annual basis. Be sure to check for a history of reverse splits also as serial diluters like to execute reverse splits to trim down outstanding shares again and repeat the dilution cycle. 

Be Aware of Shelf Offerings and Lock-Up Periods

If you are going to hold a stock for a longer period of time, be aware of any potential dilution that may occur in the future (IE: shelf offerings, end of lock-up periods, etc.). Trading secondaries can be fruitful on the short side, however, holding longs for extended periods of time require legwork in terms of research and timing.

The information contained herein is intended as informational only and should not be considered as a recommendation of any sort. Every trader has a different risk tolerance and you should consider your own tolerance and financial situation before engaging in day trading. Day trading can result in a total loss of capital. Short selling and margin trading can significantly increase your risk and even result in debt owed to your broker. Please review our day trading risk disclosuremargin disclosure, and trading fees for more information on the risks and fees associated with trading.

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