There are various ways to raise finances which companies can adopt to fund its long-term investments like stock offerings, debentures, and personal savings. Most of the times companies use stock offerings to fund its strategic projects and increase market capitalization. Initial stock offering (IPO) is the first time that a company makes it shares available to the public. The companies who are already in the market can raise their finances by issuing their stocks a second or third time to fund their rapid growth.
When companies have a secondary stock offering, they will sell new shares to the public. What this kind of offering does is decrease the holdings of current stockholders as there are now more shares available in the market. There is a dilution of ownership. The good thing with secondary stock offerings is that it encourages a wider public participation in the stock. More people can now invest and trade in the stock.
Although secondary share offerings will make the ownership well diversified, there is no dilution of ownership. It just means a lesser percentage of control for the existing shareholders.
To subscribe to new shares, you call your broker. Usually, the companies raising capital through a secondary stock offering will sell huge blocks of stocks to underwriters or huge investment funds. They will then sell these shares to retail investors and to the stock market after some time.
A secondary stock offering could bring about some positive and negative changes in the company. For one, it will increase the capital and also the number of shareholders. It will also provide the company an opportunity to invest in their growth and to enhance their assets base so they implement a long term strategy. However, a secondary stock offering can decrease the voting power of the existing shareholders and lessen their profits, if the profits remain constant.
The stock exchange serves as a secondary market for shares of companies. This allows the company to increase their reputation and get a good demand for their shares. Future stock offerings will easily be gobbled if the company performs well and future performance is positive.
Existing shareholders generally don’t like secondary stock offerings because its dilutes their voting rights because new shareholders can come in and take in a significant stake in the company and will thus a voice on how the business will be run. But of course, new capital is always great for a company. So in the long run, the price of the share will likely go up if the investments pay off.
You can learn more about investing in the stock market by starting off with secondary stock offerings because it is safer. It is usually only the established companies offering secondary shares.
The contributor of this piece has located a well respected investment relations vet named Josh Yudell. I believe Josh Yudell is a Wall Street veteran, having spent his entire career in the fields of investor relations and investment banking.