2023-06-15 18:00:05
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There are several expressions typical of the financial market that can cause doubts in those who are starting their investments. This is the case of the secondary offering of shares. Do you already know this term? In order not to be confused, it is important to understand what it means.
Thus, you can increase your knowledge of the stock market and even identify investment opportunities. After all, the secondary offer is related to the availability of shares of a company in the stock market.
Want to know more about it? So just continue reading to understand what the secondary stock offering is and how you can take advantage of it in your investment strategy.
Let’s go?
What is a primary equity offering?
Before knowing what a secondary share offering is, it is necessary to understand the concept of a primary offering. In this way, it is possible to understand the difference between the terms and avoid the misunderstandings that may arise.
In practice, the primary offering of shares is the one in which the company launches its shares on the stock exchange. Therefore, the resources raised in the sale are directed to the company’s cash.
With this money, the organization can finance its projects, pay off debts or cover other needs. It is worth knowing that the primary offering can happen in two moments: initial public offering (IPO) or subsequent share offering — also called follow-on.
Understand more about each of them!
IPO
The IPO refers to the debut of an organization in the stock market. That is, it happens when a company sells its shares on the stock exchange for the first time. Thus, the company becomes publicly traded, allowing minority shareholders to participate in its results.
As you have seen, the primary share offering serves to raise funds. However, a company can go public with other objectives, such as strengthening its positioning and expanding its market reach.
With regard to investors, the IPO is an opportunity to become a partner in companies that did not participate in the capital market. In this way, you can make profits with the appreciation of the shares and the distribution of proceeds over time, although there are no guarantees of results.
Follow on
The follow on is also known as a subsequent offer. It occurs when more assets of a publicly traded company – therefore, which has already carried out the IPO – are made available to the public.
In the case of a follow-on of a primary offering, it aims to raise funds for the company. In addition, an organization can opt for follow-on when it wants to increase the liquidity of its shares and visibility in the capital market.
For investors, the subsequent offer may represent an opportunity to acquire shares in a company at a lower price in relation to the shares that are on the market. In addition, the company’s shareholders can benefit from the liquidity generated by the increase in assets in the market.
It is worth knowing that there is a secondary offer follow-on. In the next topic, you will understand more about this subject!
What is a secondary equity offering?
Having understood what the primary offering of shares is, it is time to find out what the secondary offering is. It refers to the negotiation of securities already existing in the market, with no issue of new shares.
In this way, the secondary offering is carried out when one or more majority shareholders decide to put their shares up for sale. The intention is to reduce or eliminate its participation in the company.
In this case, the money from the transactions is directed to the selling partners, and not to the company. For this reason, there is no change in the company’s capital stock in the secondary offering of shares.
Furthermore, it is necessary to understand that the secondary offering on the stock exchange is one of the types of follow-on, as it always occurs after the IPO. But, as you’ve seen, not every follow-on is a secondary offer, as it can also come from a primary offer.
It’s also worth knowing that the secondary offering can happen with real estate investment funds, not just stocks. In this situation, there may be a greater number of shares on the stock exchange.
Example of a secondary offering of shares in the domestic market
For a better understanding of the subject, it is interesting to know a real example of a secondary offering of shares on the Brazilian stock exchange. This is the case of the privatization of Eletrobras — initially a state-owned company that coordinates all companies in the Brazilian electricity sector.
In June 2022, the Federal Government privatized Eletrobras through a global public offering of shares. Thus, a secondary offer was made, available in Brazil and abroad. That is, the Government made its papers available — that is, already existing assets.
In addition, new shares were issued (primary offering) in order to dilute the Union’s stake in the company. Therefore, the Government remained the largest shareholder of Eletrobras, but no longer holds control of the company.
What are the types of secondary offerings?
In addition to understanding what a secondary stock offering is, it is important to know that it is divided into two types according to specific rules to be carried out. Thus, you must know the characteristics of each one to understand the conditions of paper trading in these cases.
Next, learn more about the types of secondary stock offerings!
public offer
The public offering is characterized by broad access to the purchase of shares. In this way, any interested investor can acquire the shares through the trading platform of the Brazilian stock exchange (B3).
For a public offering to take place, it is necessary to have the intermediation of one or more authorized financial institutions that are part of the securities distribution system. For example, an investment bank.
In addition, the entire procedure must follow rules established by the Securities and Exchange Commission (CVM), starting with the registration with the regulatory entity itself.
Another norm is the creation of a prospectus containing data that may be of interest to the investor, such as the volume of shares traded and the price of each one of them.
After registration and announcement, B3 publishes the schedule of activities for investors to prepare for the offer. This document describes the dates of bookbuilding (investment intention collection process), reservation, settlement and start of negotiations.
Restricted offer
In contrast, the restricted offering limits the sale of shares to the company’s shareholders or professional investors. In this case, the shares can only be offered to up to 75 investors, with a maximum of 50 of these interested parties being able to buy the shares.
Given these limitations, in the restricted offer it is not necessary to prepare the prospectus or register the offer with the CVM. For this reason, the procedure is considered simpler than the previous one.
What are the advantages of the secondary offering of shares for the investor?
Now that you know more about the secondary offering of shares, it is worth understanding the advantages of this process. Thus, it is possible to identify the opportunities that may arise from this type of offer.
One of the main advantages of the secondary offering of shares is the increased liquidity of the company’s shares. After all, as new shares are offered, it may be easier to buy or sell assets.
This is also an opportunity for the shareholder to study his position in relation to the company’s shares. You can check if you want to keep, close or increase your shareholding, for example. For this, it is necessary to consider whether the fundamentals of the company remain aligned with its objectives.
Therefore, it is pertinent to do a fundamental analysis to identify opportunities offered in a secondary offering. Thus, you can know if the shares meet your expectations in the market.
How to participate in the secondary share offering?
After learning what a secondary stock offering is, how it works and some of its advantages, maybe you are wondering how to participate in this process, right?
Next, check out the step by step!
Identify your investor profile and your goals
First, it is important to identify your investor profile to understand your risk tolerance. In this sense, it is worth knowing that stock market risks tend to be more aligned with the moderate and bold profiles.
In addition, it is essential to define your financial goals with the investment. Generally speaking, actions tend to fit into long-term goals. That’s because the longer horizon helps minimize risk and optimize the asset’s earnings potential.
Open an investment bank account
To participate in the secondary offering of shares, it is necessary to have an account at an investment bank to access the home broker. It is on this platform that trading on the stock exchange takes place.
Read the secondary offering prospectus
Before participating in the offer, you should check the prospectus issued by the company. This step cannot be neglected, because from the document you will have access to important information about the offer.
Book your shares
If, after considering the pros and cons, you decide to participate in the secondary offering, please book with your investment bank. For this, pay attention to the reservation period announced in the offer schedule.
Wait for transactions to complete
Once the reservation period is over, negotiations are carried out. In the event that there is a quantity of demand greater than supply, an apportionment is carried out. In this scenario, the roles will be divided among the interested parties who made the reservation.
As you have seen, the secondary share offering can represent an opportunity to trade shares in a company that is already publicly traded. But don’t forget to consider your profile and objectives to find out if the roles fit your investment strategy!
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