Key insights
- A secondary offering priced at a premium to the current market price often leads to a decline in the stock's value. This is because the offering dilutes existing shareholders' equity. Institutional investors or sophisticated funds may agree to purchase shares in the offering at a slight discount, anticipating a short-term price decline due to increased supply. Retail investors are often left holding shares at a higher cost basis.
I see this all the time and wanted to ask what you think is going on. Say a stock is trading around $2/share. It's a pos really, very speculative, may have had it's golden days many years ago. But it's probably something that many still hold onto, perhaps because they believe there is future potential. The type of thing that could "go to the moon", if you believe in that sort of stuff.
But let's say news comes out that the company is authorizing millions of shares to be sold on an an offering. They specifically announce the price to be $1.70/share, but the reaction is public trading with bid/ask $1.29/$1.30...and pushing lower throughout the day.
So my question is, who bought those millions of shares at $1.70 when it's likely going to be valued around $1.30 or lower on the open market? Why would anyone buy the offering as that is going to be at a higher premium?