Have you ever taken the time to think if secondary stock offerings are good or bad for stockholders? We all know how much companies can profit from doing this, but do current investors benefit from them?
Not sure? Let’s break it down…
An additional equity offering — also known as a secondary offering — is when a company issues more shares of stock after its initial public offering (IPO). The company will increase the amount of shares it has in the market to raise its equity, which in turn raises capital it can spend.
Why do companies do this?
Well, the simple answer is because they can.
In the company’s mind, it makes more sense to sell stock in order to finance debt or make acquisitions.
Since secondary offerings increase a company’s already existing shares, it also ends up diluting a stock’s value for current shareholders.
These secondary offerings will either flood the market with new shares and cause the stock to sell off, or the money is used to pay off debt and improve the company’s standing.
And while this may be a great thing for the company, it’s a negative in intermediate terms for all stockholders.
So once again, we have to ask ourselves if secondary offerings are a good or bad thing for traders…
Hint: It’s a bad thing. And secondary offerings could ruin the next meme stock craze like we’ve seen with GameStop and AMC
There are actually a couple reasons why secondary offerings are bad.
The main reason is that a company is diluting its existing shareholders’ stakes by offering new stock. When there’s more stock than there was before, it becomes a less rare stock to own, causing the price to be adjusted. Just think about supply and demand…
Companies also tend to offer the shares at a discounted price — anywhere from 5% to 30% — from where it was just trading on the stock market.
Another reason secondary stock offerings are bad for shareholders is the message the company is inadvertently saying about its own stock… A company is basically shouting to traders that its stock price is too high, and it would love to get traders’ money in exchange for discounted stock.
And if that weren’t bad enough, secondary stock offerings are the biggest threat to present and future meme stocks…
Check out our short video below to learn more about if secondary offerings are good or bad,
and the Meme stocks that are in danger of tanking.
Be sure to share your thoughts in the comments section below.
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