Don Steinmann's Investment Tip of the Week

Don Steinmann's
Investment Tip of the Week

Secondary vs a Follow On Offering

I haven’t done an investing basics tip for awhile, so I decided it was about time.

Companies go public through an IPO (initial public offering) when they sell shares to the general public. For many companies, this is pretty much a one time event. But often companies will sell more stock down the line, and it’s important to understand who is selling what shares. When a company sells more shares, it’s called a secondary offering. But the source of those shares is important. If the company is selling more new shares to raise cash to expand their business, that can be a good thing. This is often referred to as a ‘follow on’ offering. Companies like real estate investment trusts do this fairly frequently. It’s neither good nor bad in and of itself, it depends on what they do with the money.

But other secondary offerings are when insiders (the company management, underwriters, etc.) are selling their own shares in a large block. The company is not getting any new money. This is just the people in the know cashing out. This is not usually a great situation, and it may be a sign for the individual investor to cash out too.

The moral here is, know whose shares are being sold in a secondary offering. One way is ok, the other way? It’s at least a cautionary sign.

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