Bill Gunderson
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What does it mean if you own a stock that has just announced a secondary offering? A lot of people think a secondary offering is a bad thing. Well, it can be, but many times, it can also be a good thing.

A secondary offering in a lousy stock is almost always a bad thing! It usually means the company is running out of money and it needs to keep raising more to survive.

Generally speaking, an owner of a lousy stock that does a secondary offering takes a big dilutive hit in ownership of company. A secondary offering obviously also dilutes the earnings per share of a company. But, a secondary offering by a good company is not necessarily a bad thing.

A second offering can indicate that a lot of good things are happening at the company. It can be an indication that there is strong demand for the shares and that the company is growing.

Generally speaking, a good company will proceed with a second offering because its shares are in demand and appreciating. So a company will then decide to take advantage of the favorable markets and favorable opinion towards their stock to float more shares and raise some cash.

This allows it to take the proceeds from that secondary offering of shares and reinvest them into the company in order to grow it further in spite of the current shareholders being diluted according to the size of the secondary offering.

But the hope is that, in the long run, the shareholders will be rewarded because the company will have successfully grown as a result of the proceeds of the secondary offering being used wisely.

Now a secondary offering is obviously different from an initial public offering. When Twitter goes public here at some point in the future, they’ll do an Initial Public Offering (IPO).

In other words, Twitter will be selling current insider shares to the general public and there will also be an offering of new public shares that have been printed or established for the public to buy. So no longer will Twitter be a privately-traded company, it will then be a publicly-traded company.

Not too long ago I did a whole piece on the dangers of buying into a private company. Buying into one is a liquidity trap—there’s no market for your shares unless the company goes public, gets bought out, or somebody else buys your shares (normally at a steep discount to what you paid for them).

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Bill Gunderson

Bill Gunderson is the CEO and Chief Market Strategist of Gunderson Capital Managment in San Diego, CA. He is also a professional money manager, former research analyst, author of Best Stocks Now.