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Secondary Offering

Trading shares directly between investors

What is a Secondary Offering?

In finance, a secondary offering is when a large number of shares of a public company are sold from one investor to another on the secondary market. In such case, the public company does not receive any cash nor issue any new shares. Instead, the investors buy and sell shares directly from each other. It differs from a primary offering, where the company issues new shares into the market.

 

How a secondary offering works

Image: CFI’s Free Intro to Corporate Finance Course.

 

Primary vs Secondary Market

In the primary market, companies issue new share to investors in exchange for cash. The proceeds from such an offering are used to fund the business, make acquisitions, and for general corporate purposes.

In the secondary market (as shown above), investors buy and sell shares of publicly traded companies between each other, directly. No new shares are issued by the company, and the company doesn’t receive any additional capital.

 

Secondary Offering Example (Facebook)

An interesting secondary offering example occurred in 2013 when Facebook CEO Mark Zuckerberg sold approximately 41 million of his own shares to other investors. Since he was selling his personal shares, he received the proceeds directly from investors, instead of the company receiving them. The reported reason for him selling the shares was to raise money for his own personal tax bill.

In addition to Zuckerberg’s secondary offering, the company also issued some new shares to the public, which did net them some proceeds for corporate purposes. It is common to hold an offering with a combination of primary and secondary sales.

Learn more from CNET about Facebook’s offering.

 

Secondary Offering vs Follow-On Offering

In a follow-on offering (sometimes called a “seasoned” equity offering), a company is returning to the capital markets, selling new shares to raise more money. The first time a company sells its share to the public is called an Initial Public Offering (IPO). All subsequent offerings following the IPO are called follow-on or seasoned offerings.

 

Summary of Key Concepts

Initial Public Offering = the first time a company issues shares to the public (can include new shares and secondary issuance)

Follow-on Offering = any subsequent offering following an IPO (can include new shares and secondary issuance)

Secondary Offering = when shares are bought/sold directly between investors (no new shares are issued)

 

Additional Resources

Thank you for reading this guide to better understand how companies and investors buy and sell shares from each other. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification designed to transform anyone into a world-class financial analyst.

To help you advance your career, these additional resources will be helpful:

  • The IPO process
  • What do investment bankers do?
  • Financial modeling guide
  • Company valuation

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