Secondary offering of shares explained in an easy way!
Find out now what the differences are between primary shares and secondary share offerings and understand how the main types of public share offerings work!
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Have you heard about primary and secondary share offerings? These are the main types of public share offerings.
When a company goes through an IPO, investors can become shareholders in the company.
However, it is important to understand that there are different types of share offerings on the stock exchange, which depend on the main objectives sought by the company.
And if you want to understand more about the subject, continue reading. We will explain how it all works.
What is a share offering?
The offering of shares is the process that enables the sale of shares in a company to people interested in investing in it.
This process, in fact, is better known as a public offering of shares, which in most cases can be primary or secondary.
Thus, the company's capital is opened and the shares begin to be traded on the market.
In addition to companies, real estate funds (FIIs) also carry out IPOs, as they have shares traded on the stock exchange.
What is primary offering?
When a company decides to open its capital, it carries out the IPO Initial Public Offering or in Portuguese Initial Public Offering.
In other words, the company will offer its own shares on a stock exchange.
Therefore, an IPO is the process in which a company becomes listed on the stock exchange. The investor can invest in the shares and thus become a minority shareholder.
In this case, the money from the sale of the issued securities goes directly to the company's cash flow.
This means that the issuing company will make shares available and raise funds to finance its projects.
By issuing new shares, the company in question is able to increase its shareholder base.
To make an IPO or a primary offering, it is necessary to go through a process regulated by Securities and Exchange Commission (CVM).
What are the risks of a primary offering?
Anyone who invests in an IPO can count on the possibility of good profitability in the medium and long term.
However, we are talking about variable income and therefore, it is necessary to be even more aware of the risks involved.
The main risk related to a primary offering is that, as the company's shares have never been traded on the stock exchange, it is not possible to know exactly how it will behave on the market.
After all, shares can fluctuate upwards, which is good for shareholders. However, they can also fluctuate downwards.
Of course, these fluctuations always happen. But when it comes to companies that are already listed, investors can check charts and make an analysis based on that.
For this reason, it is very important to read the Issuance Prospectus, or Preliminary Prospectus, which contains important information such as operation risks, reservation period, feasibility study, among others.
What is a secondary offering of shares?
the term secondary offering of shares can refer to different concepts in the financial market. The main one is when investors sell their IPO shares on the secondary market to other investors.
In negotiations between each other, money is exchanged between investors, that is, it does not go to the company's cash register.
Another very common definition for a secondary offering is when companies seek solutions to raise additional capital in a follow-on offering sometime after the IPO.
The main objective of a secondary offering of shares is to increase the number of shares of a company listed on the Stock Exchange.
In this case, your bid is reserved for companies that already have public capital and have previously launched an initial public offering.
What is the main difference between primary and secondary actions?
As you can see, in the primary offering, the company sells the shares and the money goes straight to the cash register.
It occurs with the issuance of new shares/quotas of investment funds that will be offered on the market.
A secondary offering occurs when shares/quotas of existing investment funds are offered, causing resources to circulate among investors.
What are the advantages of a public offering of shares?
A public offering of shares generally brings several advantages to the company.
After all, it is one of the main ways to obtain financial resources, in addition to debentures and loans.
However, loans, due to the interest, are very expensive. Another major disadvantage of financing is that the company in question may have to take on debt for several years.
Therefore, for the company, the public offering of shares helps to obtain resources and avoid debt.
Investors, on the other hand, can start investing in shares at reduced prices, because when a company debuts on the stock exchange, companies start selling shares at a lower than expected value.
Assets tend to appreciate on the day of their debut and in the following weeks. However, this appreciation does not always happen. For this reason, before buying shares, it is very important to take into account your investor profile.
After all, as there is less historical data to analyze, the risks may be greater.
How to participate in a share offering?
The first step is to open your account with a stockbroker or investment bank.
It is through these institutions that you can make your negotiation offer.
Then, it is important to understand the your investor profile, so that you can analyze your characteristics, preferences and tolerance to risks in the world of investments.
This way, you can assess whether buying or selling shares in a given company is an interesting strategy for your portfolio.
Also, be sure to read the Issuance Prospectus, or Preliminary Prospectus, as this is essential for you to better understand the company in question.
If you have already decided that you want to participate in the public offering, you will have to make a reservation of shares, filling in the financial volume that you want to spend buying assets from that offering.
What is the difference between primary and secondary distribution?
A primary offering is a capital raising exercise. Typically, a company issues new shares to investors for the purpose of raising money.
The money raised, in turn, can be used to grow the company, finance business operations, pay off debts that are about to mature and even avoid taking out a loan at moderate to high interest rates.
Primary share offerings, or IPOs, take place when a company goes public on the stock exchange for the first time.
However, the secondary stock offerings, as far as you are concerned, it happens when the company already has shares trading on the stock exchange and wants to increase the quantity, thus issuing them for the second time.
In this offering, investors who already own their IPO shares can trade them among themselves.
Typically, these partners want to divest or reduce their stake in the business. The money raised goes to the partners who sold the shares.
What should I know about primary and secondary offerings of shares?
To understand a little more about the difference between primary and secondary share offerings, see the table below.
| IPO – Primary Offering | Follow on – Secondary Offer |
| Issuance and sale of new securities. | Trading of existing shares. |
| Money goes to the company's cash register. | Money goes to investors who trade the stocks. |
| There is no way to restrict investor access, that is, the offer will always be public. | The company can invite as many investors as it wants, making the offering more restricted. |
| Raise capital for specific projects and goals. | Cease to be a partner or reduce your participation in the company. |
| Tells you what you are investing in. | Tells you how much of a stock you own. |
As an investor, it is important that you are aware of the secondary stock offerings: they can have a considerable impact on stock prices.
This is because one of the main advantages it offers is the increase in liquidity of a company's shares.
Furthermore, when a company announces a secondary offering, its shares end up having more advanced volatility.
In this way, the speculator or investor may have a great opportunity to buy shares at more attractive prices.
Another important fact that the investor must analyze about the follow on it's because the company is doing a secondary offering of shares before deciding to invest.
This is because stock prices can be affected in both the short and long term, depending on the reasons.
When the company's objective through primary share offering is to get money to make the company grow and carry out projects, the investor has more confidence, as he sees that the company believes in its business.
What is a public offering?
In short, it is when a company makes securities available for sale.
This offer is made publicly and is addressed to all investors simultaneously.
In the capital market, there are different models of public offerings, the main ones being:
- IPO;
- Primary public offering;
- Secondary public offering.
Public offerings, in addition to the IPO, give investors more alternatives in fixed income and variables.
Furthermore, it is a good opportunity to make great profits with shares that are being offered on the market for the first time.
What is an initial public offering?
Also known as an IPO, an initial public offering is when a company issues and offers shares for the first time.
This is the first step for a company to start on the Stock Exchange. In the initial public offering, the shares are not restricted, that is, they are sold to the general public, unlike the secondary offering of shares.
How does the public offering of real estate securities work?
According to the law 6385/1976, changed by law No. 10,303/2021, the following are considered securities:
- Shares, debentures and subscription bonuses
- Shares in investment funds in securities;
- Securities deposit certificates;
- Between others.
The incisor nine (IX) still says the following: “when publicly offered, any other securities or collective investment contracts, which generate the right to participation, partnership or remuneration, including those resulting from the provision of services, the income from which comes from the efforts of the entrepreneur or third parties”.
On a Stock Exchange, real estate securities are bought and sold. They are financial securities with special characteristics, such as shares and Investment Fund shares.
When purchasing a financial security, the buyer always receives some financial right, the right received depends on each product.
Securities are subject to regulations that are the responsibility of the CVM (Securities and Exchange Commission).
To issue a real estate security, the institution needs to be registered with the CVM, but, in addition, it needs to register this title with the entity.
What public offerings are currently underway?
According to B3, Brazil's official stock exchange, the public offerings currently underway are:
- Restricted Effort Offers – IRB-Brasil Resseguros SA (Ordinary Shares)
- Brazilian Power Plants SA. – Eletrobras (Ordinary Shares)
- Allied Technology SA (Ordinary Shares)
On the B3 website you can find out how to participate, however, it is worth mentioning that you must be a client of a bank or brokerage firm that is participating in the offer.
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Conclusion
Now you know the difference between primary and secondary actions!
The public offering of shares represents an opportunity to buy shares. However, before making any decision, you need to understand your investor profile so that you can analyze whether this type of investment is aligned with your goals.
