January 19, 2011
a shareholder’s guide to discerning stock promoters
Secondary market offering which refer to the registered sale of shares of stocks initially sold to the primary market is also known as secondary market offering. Initial public offering is different from secondary market offering in the sense that in initial public offering, proceeds from sale goes to the issuing company while in secondary market offering, the proceeds goes to the shareholders.
Secondary market offering should be distinguished from primary market offering. Primary market offering refers to initial offering of shares of stock to the market while secondary market offering refers to the subsequent sale of previously issued shares to the market. Considering that in the secondary market offering no new shares are created, it does not dilute the concentration of the existing stockholders interest. This is the reason why it is said to be non-dilutive.
Among the reasons why stockholders who avail of initial public offering opted to sell their shares thru secondary market offering is to expand their investments. A good illustration of this is the offering of shares to the secondary market of the shares previously acquired by the directors and its related parties from the initial public offering. As the ordinary course of issuance of shares goes, it is the directors and related parties of the issuing company who originally acquire shares arising from the initial issuance of shares to the public.
In cases when the market price of the shares of stocks went up after initial public offering, those who originally acquire shares from initial public offering mostly decide to sell their shares in the secondary market offering. Those who trade or sell their shares earn profit arising from the price difference between the acquisition cost and the selling price of the subsequent sale. This benefit is in addition to the chance of diversifying their investment.
Institutions who intend to gain control over the issuing company are those who usually buy shares thru secondary offering in order to increase their shareholdings.
Secondary market offering is different from follow-on offering also known as dilutive secondary offering or subsequent offering. While no shares of stocks are created in the secondary market offering which in effect do not dilute the shareholders interest, however in follow-on offering, new shares are created by the issuing company and float it to market thereby diluting existing shares of the current stockholders. This is the reason why follow-on offering is also called dilutive secondary offering.
To point out the difference between the secondary market offering and follow-on offering, it is important to give emphasis to the kind of market the aforementioned are offered. Secondary market offering is the subsequent offering for sale of shares in the secondary market while the follow-on offering is the subsequent initial offering of shares to the primary market. Hence, any offering of shares arising from subsequent initial issuance of shares , which may be second or even third, are referred to as follow-on offering.
For better understanding, it is likewise important to give emphasis to the resulting effects of the aforementioned to the shareholders. As already discussed above, secondary market offering does not affect the total shares available to the market hence, it is non- dilutive. On the other hand, considering that new shares are created in follow-on offering, it said to be dilutive. This is in addition to the fact the fact that the proceeds from sale thru secondary market offering goes to the shareholders while in follow-on offering, it goes to the issuing company.
The columnist of this piece has determined an advisor by the name of Wade Entezar.
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