In the stock market, there are two markets: the primary and secondary. If the company will list for the first time and raise capital for the first time, it is called the primary market. This is where companies will do their initial public offering. When they do initial public offerings, it is usually because they are raising their capital to finance their rapid growth. The secondary market, on the other hand, is where secondary stock offerings happen. Another name for a secondary stock offering is a follow-on share issue. The secondary market is the avenue to raise capital for those already listed in the stock market that is done with their initial public offerings.
The benefits of a stock offering are plenty. For the investors, they can come in and join in the potential profitability of the company. They have the chance to earn dividends or capital growth through share price appreciation. The company will then use the proceeds from the offering to finance their projects for expansion and growth. Current shareholders can also unload their shares to get new capital in. The shares will, of course, be sold at a premium. The investors’ base for the company will also be widened. It will be more balanced and diversified with no single group having too much clout in the decision-making of the company.
This offering also has several implications for existing shareholders. If the company enhances its capacity and rakes in more profits, the shareholders would benefit more from the companys earnings, in the form of dividends. However, if the company does not succeed in building up its profits, the existing shareholders may lose some powers in voting and face declining dividends.
Stocks traded in the secondary market have no direct effect on the company, only on its market value. Financial Institutions and banks may underwrite the new company stocks and large investors may sell their stocks to decrease their holdings or to diversify their portfolio. Good investors would prefer not to keep their eggs in a single basket.
When companies raise new capital via secondary public offerings, they use the capital raised to do their expansion plans or to pay off debts. Companies always need financing at all times, especially in times of recession or economic problems. As they say, cash is king.
If the secondary stock offering is to finance growth, the price of the stock will tend to go up. If the offering is to pay off debts or to merely survive, the price of stock will plummet to all time lows. Long term investments need continual financing so secondary stock offerings are a good and simple way to finance these projects. It is also important to take advantage of opportunities that come along the way. For these opportunities to materialize, you need lots of capital. One of those sources is secondary stock offerings.
Another name for the secondary market is the dealer market. This is where trading of stocks and bonds happen. For trading of bonds, it is called the debt market. For stocks, it is called the equity market. Secondary stock offerings are only done in the secondary market. The primary market is for initial public offerings, those that will raise finance for the first time.
Secondary stock offerings happen in good economic times as well as times of economic difficulty. But in times of average growth, secondary stock offerings are not usual.
The contributor of this essay has detected a well respected investment relations vet by the name of 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.
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