What is Secondary Offering?

A secondary Offering is a situation when an investor chooses to sell a large portion of their stock to another investor in the secondary Market. When a company considers a secondary offering, the key things that change are the existing shareholders' dilution and the firm's share ownership.

The public company does not receive any Capital or issue any additional shares in this situation. Instead, investors buy and sell stock directly from one another. It's not the same as a primary offering, in which the company sells fresh stock to the public.

Types of Secondary Offering

There are two types of secondary offerings - non-dilutive secondary offering and a dilutive secondary offering. The distinctions between each are mentioned below.

1. Non-Dilutive Secondary Offering

In a non-dilutive secondary offering, a company does not have to generate new blocks of shares to sell to the public. Instead, current shareholders sell part of their shares in the company. In a non-dilutive secondary offering, existing shareholders of a company's shares are not diluted. Insiders are normally allowed to sell their ownership after a "lockup period."

2. Dilutive Secondary Offering

Follow-on offering or subsequent offering are other terms for a dilutive secondary offering. It occurs when a firm generates and sells fresh shares, diluting the existing stock. This looks more like an Initial Public Offering (IPO). Also, this situation arises when a company's board of directors agrees to raise the number of shares in order to boost equity.

Dilution of Earnings Per Share occurs as the number of outstanding shares increases. The extra revenue might be put toward debt repayment or other long-term objectives. Due to the sheer increase in the number of outstanding shares, a dilutive secondary offering usually leads to a reduction in stock price; however, markets can respond extremely quickly.

Primary Vs. Secondary Offering

The key distinction between a primary and a secondary offering is the manner in which shares are acquired. A primary offering is one in which the issuer sells shares directly to investors, whereas a secondary offering is one in which investors buy shares through sources other than the original issuer. However, in a dilutive secondary offering, the firm itself reissues additional shares into the market; thus, this isn't always the case.

Secondary Offering Vs. Follow-On

Aside from IPOs, not all of the offerings are secondary. For any further capital requirements, the issuing business may return to the capital market through a follow-on offering. This offering is also known as a seasoned equity offering. There is a clear distinction between secondary offering and follow-on offering. The term "follow-on offering" refers to when an issuing business returns to the primary capital market with a fresh offering after launching with an IPO. When a company joins the primary capital market, it always obtains capital.

The issuing firm, on the other hand, doesn't participate in secondary offerings, and as a result, it does not get any capital.

Secondary Offering: Good or Bad?

Although IPOs may appear appealing, they are not the greatest investment decision. To expand their stock market fortune, investors must thoroughly study and keep a keen eye out for options. Keeping a watch on the Earnings Per Share (EPS) can help you spot capitalization and dilution. A secondary offering is favourable to IPOs since it exposes investors to a lower risk of EPS decline.

The Bottom Line

The secondary offering is tailored to the needs of potential subscribers from different Income groups. It provides liquidity, which ensures that investors' deposits can be converted into cash quickly. Switching between long, medium, and short-term investment provisions is also possible with secondary offerings. Thus, the Stock Exchange, a secondary market, serves as the Economy's ticker or, to put it another way, a dependable barometer for a country's economic health.