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What is Secondary Offering IPO and Its Types

15 Jun 2023

Generally, when a company chooses to go public and present its shares for the first time to the public, it does so through an initial public offering (IPO). However, a company can run a secondary offering following the initial offering to raise additional capital. This permits existing shareholders, like the company's founders, personnel, or early investors, to sell their shares to the public.

This post closely examines Secondary Offering IPO and their types. 

What is a Secondary Offering IPO?

As the term implies, secondary offering implies the sale of investor-held shares in the secondary market. The same shares are offered for sale on the secondary market as were issued in the initial public offering. 

During an IPO, the company collects the proceeds from offering shares to the public. However, because investors in secondary holding are the proprietors of the shares being sold, only they receive the proceeds. 

The meaning of secondary offering doesn't restrict to the above definition. Occasionally, a public company that previously issued shares through an initial public offering might issue additional shares, also known as follow-on offerings. In other instances, investors may notify the company of their desire to liquidate their holdings. 

What are the Types of Secondary Offerings?

There are two types of secondary offerings which are as follows:

  1. Non-dilutive secondary offering: A non-dilutive secondary offering will not dilute shares because the shares sold were previously issued in the initial public offering. So this only involves the exchange or trading of shares. In addition, because no new shares are issued, the issuing company might not gain anything from them. A non-dilutive secondary offering typically occurs when the lock-up period expires or within a few years following an IPO. 
  2. Dilutive secondary offering: It is the contrary of an offering that does not dilute. Also referred to as a Follow-on Public Offering (FPO), the issuing company makes new shares available for investors. This type of offering is dilutive because it dilutes the ownership of present shareholders.

Note that the board of directors plays a significant role in the decision-making process regarding issuing new shares.

What are the Effects of Secondary Offerings?

Secondary offerings can have an effect on investor opinion and the price of a company's stock. For example, investors may anticipate bad news if a significant shareholder sells many of their shares. Also, a secondary offering that dilutes the share price typically results in a price decline, but the market could react unpredictably. 

The specific cause for a stock price increase after a secondary offering is not always obvious. Sometimes, investors respond positively to an offering if they believe the sale's proceeds will benefit the company. Whenever a company employs the funds to settle debt, initiate an acquisition, or invest in the company's future, the offering may be viewed favourably.

Should You Invest in Secondary Offerings?

To decide whether to invest in such offerings, you should be mindful of the risks and potential returns of such transactions.

For instance, if it is a non-dilutive public offering, study why investors sell their shares. There may be both positive and negative motives. Avoid bias and conduct thorough research. 

However, if the offering is dilutive, current shareholders will lose ownership. Now that there are more outstanding shares, stock prices may decline. Additionally, you must consider the amount of risk involved. However, bear in mind that volatility generally becomes lower after an IPO. 

Investors can easily decide to engage in a secondary offering because they can access the company's historical data. In contrast to an initial public offering, where you do not know the company's shares performance in the past, you have information and knowledge here.

Conclusion 

A secondary offering allows existing shareholders to sell their shares to the public, providing liquidity and an opportunity to monetise their investment. The decision to invest depends on your preferences and your data about the company. 

 

Related articles: 5 Tips for Investing In IPOs | What's the big deal about IPOs | Clearing the confusion from IPOs | IPO in India- The future looks bright | Upcoming IPO

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