A secondary offering is when a company’s shares that were already sold in an IPO are sold again on a secondary market by investors. Proceeds from these offerings are distributed to investors who are re-selling the shares, and not to the company.
Secondary offerings take place as some companies decide to have follow-on offerings, which usually take two different formats: non-dilutive and dilutive secondary offerings. The former won’t result in an increase in shares, while new shares are created in the case of dilutive secondary offerings.
A dilutive secondary offering tends to result in shares underperformance as new units are created. Moreover, if a large shareholder is selling through a secondary offering, then investors may anticipate a negative announcement is in the pipeline.
On the other hand, investors could send shares soaring following a secondary offering announcement if they feel the funds that the company is looking to raise could be used to fuel growth.
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