The effect of a public offering on a stock price depends on whether the additional shares are newly created or are existing, privately owned shares held by company insiders.
The effect of a public offering on stock price will ultimately be determined by the specific type of shares offered. If the shares are being newly created, for example, this could dilute the share price and lower the per-share return.
Stock shares represent a partial ownership of the company. The more shares you hold, the bigger the slice of the company you own. As an owner, you are entitled to vote at corporate meetings and to participate in the growth of the company through dividends and higher share prices.
One measure of share value is earnings per share EPS , which is the annual profit of the corporation divided by the number of shares. The money raised by a public offering is not earnings. Dilution occurs when new shares are offered to the public, because earnings must be divvied up among a larger number of shares. Frequently, when a company offers public shares for the first time an initial public offering, or IPO , corporate insiders such as founders, directors and venture capitalists are barred from participating.
A 'rights issue' is where an already listed company seeks to raise additional capital by offering new shares to existing shareholders. Shareholders are offered additional shares in the company on a predetermined basis; for example, one additional share for every 10 held. Rights issues are normally offered at a discount to the prevailing market price. Participation is optional.
A 'placement' is where an already listed company seeks to raise equity capital by offering new shares to a number of selected investors. Placements are typically made to institutional investors such as fund managers, but can also be made to clients of stockbroking firms. Placements are normally offered at a discount to the prevailing market price. The information on this website has been prepared without taking account of your objectives, financial situation or needs.
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How It Works. Deeper Dive. Investing Investing Essentials. What Is a Public Offering? Key Takeaways A public offering is when an issuer, such as a firm, offers securities such as bonds or equity shares to investors in the open market. Initial public offerings IPOs occur when a company sells shares on listed exchanges for the first time. Secondary or follow-on offerings allow firms to raise additional capital at a later date after the IPO has been completed, which may dilute existing shareholders.
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Related Terms Learn About Secondary Offerings A secondary offering is the sale of new or closely held shares of a company that has already made an initial public offering IPO.
Subsequent Offering A subsequent offering is the issuance of additional shares of stock after the issuing company has already had an initial public offering. Issue An issue is the process of offering securities to raise funds from investors.
Offering An offering is the issue or sale of a security by a company.
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