Stock Offering – Breaking Down the Different Types of Offerings

  • October 9, 2020

A stock offering is an essential part of the stock market. The world of finance is dynamic and vast. There's a lot that goes on to make the stock market run smoothly. 

Since the inception of financial securities and its market, we've been on the chase to find ways to profit. The goal is to gain financially from this marvelous creation.

As a trader, you need to know what to be aware of when it comes to stocks. One such component of the financial markets are stock offerings. Therefore, this article is going to explain what stock offerings are. So, let’s get started!

Wall Street

What Is A Stock Offering?

  • You may be wondering what a stock offering is? Well, it's when a company issues or sells a stock or bond to the public. It's a way for companies to sell a share of their business to the public to generate capital. 
When companies go public, they give us the opportunity to buy stock in their company. Our buying and selling generates company revenue. In fact, it makes us investors of the company if we hold long term.

Why do companies do this? For various purposes like expansion, development, inventory uses or balancing debt, etc. Stock offerings are done various ways. Therefore, get ready, because we're about to explain it all in detail.

These offerings will have a bullish or bearish effect. This can affect, not only the stock, but the market as well. 

For example, if Apple is having a bearish day, then the rest of the market is typically down. Keep that in mind. We can get really excited about offerings only to be in the red.

1. Primary and Secondary Market

Did you know there are two different different markets for a stock offering? They're the primary and secondary markets.

The primary market is a place where securities or shares are created and issued for the first time. In other words, a private company going public for the first time.

The secondary market is a place where securities are traded, bought, and sold by investors and traders daily. This is the market we're most familiar with. Especially if you do options trading.

In the primary market, companies sell their stocks and bonds to the public for the first time via Initial Public Offering (IPO). This generates funds and allows them to publicly list their companies on the stock exchange.

IPO's are attractive to traders. We like the potential we see and the ability to cash in on that potential.  

The secondary market is basically the stock market and exchanges. This is where stocks are listed, sold, bought and traded.

Both these markets have crucial and dynamic functions. These markets work together to make the financial world balanced and harmonious. 

The primary and secondary markets need each other. Each one serves a purpose in getting us stocks to trade.

Stock Offering

2. Primary Offering

A primary stock offering is the first time a security or bond is floated or sold to the public. As a result, a company raises the capital they need to grow and expand.

The process a company follows to offers its shares for sale is known as an Initial Public Offering also known as an IPO. 

In other words, a private company wants to be listed on the major stock exchanges. As a result, they become a publicly listed company. Then its shares are traded on the secondary market; also known as the stock exchanges. 

Filing for an IPO is no easy feat. First, they need the proper documentation in order to meet the necessary requirements. Second, they need approval from the people in charge. So how do they make this happen?

This involves creating a written catalogue explaining the company, its business, and its future. Then they have to detail how they plan on utilizing the funds which they'll generate from the sale of stock. Therefore, a primary offering is conducted through an IPO.

3. Initial Public Offering

The process of an Initial Public Offering (IPO) involves the offering of shares of a private company to the public via a new security issue.

Now we know from reading above, by the time a company is IPO ready, they've done extensive research into their brand. Think Uber vs Lyft stock.

This process involves hiring merchant bankers who assist and conduct the entire process of an IPO for the corporation. The company must meet the mandatory requirements put out by the Securities and Exchange Commission (SEC) to conduct an Initial Public Offering.

An IPO provides a company with the opportunity to generate capital for further expansion or growth by offering its shares. Investment banks and merchant bankers help the corporation decide the price, date, and various other aspects for the IPO. 

By conducting an IPO, the company also provides an exit to the various angel investors, company founders and others involved to gain and fully profit from their initial investments.

Would you exit a private company who was going public? That's something we've never considered. I think I'd take the profit from my initial investment instead of having to share profits with everyone.

4. Why IPO's Excite Us

If you're apart of our Facebook page or in our trade rooms, then you'll see how exciting an IPO can be. It's a brand new company we can get in on at the "beginning".

It's has history and yet, it's untapped potential. As a result, we have stars in our eyes. Or I should say dollar signs. 

What's the goal of every trader? To make money. And to make as much as we possibly can. We can admit it; we're a little greedy at times. 

An IPO is like fresh meat for us. Untapped profit potential. Hallelujah! Therefore, knowing how to read charts, patterns and technical analysis is key.

Couple that with fundamental analysis, and we're well on our way to profit. Hence why IPO's are exciting. Remember, however, that they can be bearish initially. 

We forget that. When it happens, we're scratching our heads wondering what went wrong. Hence why this article is helpful. 

There are different offerings. As a result, if we understand them, we understand price action that happens as a result of the offering.

Studying Stock Offerings

Is an Offering Good for a Stock?

  • That depends on the offering type. We know money is raised during a pubic stock offering. However, we need to understand it's not the same as earnings. When a stock is made public, shares are available to the public. Which, in turn, means dilution happens. This occurs because earnings money must be divvied up among everyone. More shares mean more people receiving earnings money. So it's probably not going to be as profitable in the beginning. 

To understand if an offering is good for a stock, you need to understand the different offering types. As a result, we hope you're reading and taking in this article.

Different offerings bring different results. They're another way to make profit. And that's the goal. Think of it like the staircase in the main hall of Hogwarts. Yes, a Harry Potter reference. 

The staircase moved at will. They had to learn how to use it. Trading is much the same. Learn how to navigate it, and you'll last a long time.

1. Advantages of an IPO Offering

  1. An IPO provides the company with a large capital from the public for selling the company shares.
  2. It helps increase business transparency as after being listed in an exchange. The company must come up with quarterly earnings reports to share the financial health of the organization
  3. A public company can also raise additional capital in the future via secondary stock offerings. This is always an advantage.
  4. Conducting an IPO and getting listed increases the reputation and image of the company. And gives it tremendous exposure; which can help in the increase of sales and overall revenue.

2. Disadvantages of IPO Offerings

  1. Conducting an IPO is an expensive and time-consuming process that involves multiple costs and expenditures.
  2. After being listed, the organization has to mandatorily disclose all its financials, tax details, revenues, and other business information. This can be used negatively against them.
  3. After being listed and having various shareholders, the company has to maintain proper legal and official documentation. If neglected, lawsuits can be filed against them.
  4. A proper team of accountants, legal advisors, and financial analysts have to be maintained to generate the proper documentation. This includes quarterly earnings reports and various other documents. Which is an increase in expenditure for the company.

3. Secondary Offerings

A secondary stock offering is the sale of new shares of a company that's already listed on the exchange. In other words, a company that has previously conducted an IPO.

This process of offering shares for the second time is done for multiple reasons. Firstly, the company might be looking for an additional round of funding for expansion, growth, or other purposes.

Secondly, it can be done if the company and its shareholders are looking to release a large part of their shareholdings for funds. 

This process involves issuing new shares for a company whose shares are already being actively traded in the markets. There are two types of secondary offerings which are dilutive stock offerings and nondilutive stock offerings. 

In essence, a secondary offering kind of sounds like the company needs more money. That could be a good day trading stock.

DKNG Secondary Offering

How Does a Stock Offering Work?

  • This occurs when a company makes a public sale of their stocks, bonds, or any other security. Typically, you'll see this with IPOs or secondary offerings. If you've been paying attention to this blog, then you already have a pretty good understanding how a stock offering works. 

1. Dilutive Stock Offerings

Do you know what a dilutive stock offering is? How does it occur? This happens when a company creates and places new shares in the market.

Thus, diluting the existing shares. In other words, making shares more available which makes price go down. It starts off bearish but this way, they increase the share float.

A float increase ultimately generates funds that can be further utilized by the company. A larger float means more access for you to get your hands on the stock. The more we buy, the more they profit. 

2. Non-Dilutive Stock Offerings

Non-dilutive stock offerings don't benefit the company financially. Why? There's no dilution to the shares. In other words, new shares created aren't created.

This offering is more about increasing liquidity. Liquidity is a necessity in trading. Have you ever tried trading a non-liquid stock? It's painful. And, you typically lose.

How does a non-dilutive stock offering happen? Private shareholders offer shares to the public. Who are these shareholders? Company owners, venture capitalists, angel investors, and others who are looking to cash in their holdings.

Secondary share offerings are often conducted via a follow-on offering. Another type of offering to be aware of. What is a follow-on offering? This is a process through which the company can issue new shares to existing shareholders and new investors. 

Do Stocks Go up After Public Offering?

  • Earlier we talked about giving initial investors an out when going public. One reason why I'd choose to do that is the result of stock price once an IPO happens. More often than not, price is going to go down on an IPO. As a result, stock price isn't great and neither investor sentiment. Therefore, if I'm an initial investor, I'm out. I can always get back in at the lower price.

1. Follow-on Stock Offering

A follow-on stock offering is also known as a subsequent offering. It's done by issuing of additional shares of a company. In fact, they plan to sell these shares in order to generate capital. 

Which brings about additional revenue. Who doesn't like revenue? We as traders sure do! That's why we look at companies having IPOs and offerings. We want in on the ground floor of something big. Hopefully, we're right.

There are two types of follow-on offerings. They're diluted and non-diluted stock offerings. In essence, each offering has a diluted and non-diluted offering. 

This process of issuing new shares is conducted when the company already has shares listed in the market and they're trading at a certain value.

A follow-on offering can be both bearish and bullish for a stock. If the offer is oversubscribed, which indicates that people are willing to purchase this share, it may be bullish.

And if the issue is undersubscribed, which indicates a negative market sentiment towards the company, it can be bearish for the stock.

The fight of the bulls and the bears is a traders bread and butter. You could be trading Virgin airlines stock or Apple. Knowing how to make money whether a stock moves up or down is important. 

You'll have a successful trading career if you can make money no matter the stock's direction.

IPO Offering

2. Advantages of Follow-on Stock Offering

  1.  A good method to generate additional revenue through issuing shares without taking on new debt.
  2. This method also offers an exit to early investors, angel investors, venture capitalists, etc.
  3. Issuing additional shares also increases the liquidity of the security in the markets.
  4. It allows new and additional investors to purchase a stake in the company’s shareholding.

3. Disadvantages of Follow-on Stock Offering

  1. A follow-on offering can often result in a decrease of the share price resulting in a bearish move for the stock.
  2. An additional issue of shares shows the company’s lack of revenues and funds.
  3. A follow-on offering can be undersubscribed and can cause a negative sentiment in the market, for the company, and its shares.

Conclusion

Stock offerings are a way for the people to buy or take a stake in their favorite company. Which means financial benefits. And who doesn't want that? Now that you understand it, enjoy trading them for a profit!

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