What Is a Primary Offering?
A primary offering is the first issuance of stock from a private company for public sale. This is the means by which a private company can raise equity capital through financial markets in order to expand its business operations. This can also include debt issuance. A primary offering is also known as an "initial public offering" (IPO).
Primary Offering Explained
Primary offerings are usually done to help a growing company expand its business operations, but it can also be done by a mature company that's still private. After the offering and receipt of the funds raised, securities are traded on the secondary market, where the company does not receive any money from the purchase and sale of the securities they previously issued.
A primary offering is a rite of passage for a growing successful company, as it goes from being private to being public and registered with the Securities and Exchange Commission (SEC). The SEC requires corporate issuers of primary offerings to file a registration statement and preliminary prospectus, which must contain the following information:
- A description of the issuer's business.
- Names and addresses of the key company officers, with salary and a 5-year business history on each.
- Amount of ownership by key officers.
- Company's capitalization and description of how the proceeds from the offering will be used.
- Any legal proceedings that the company is involved in.
The initial shares are usually purchased by a syndicate of underwriters, who then resell the shares to those who've received an allocation. Demand for IPO stocks often overwhelms supply because IPO stocks normally zoom higher, at least temporarily, once they start trading in the secondary market.
Primary Offering vs. Secondary Offering
Public companies can choose to issue additional shares of stock after a primary offering. These are called secondary offerings. Secondary offerings increase the number of outstanding shares available for trade in the secondary market, thus diluting the value of each share. Large shareholders sometimes will create a secondary offering, but this does not create new stock and does not benefit the issuer.
Primary Offerings and Secondary Markets
After a primary offering or secondary offering, shares are available for sale on a secondary market. The New York Stock Exchange is an example of a secondary market. In secondary markets, specialists are responsible for “making a market,” which requires them to be the buyer or seller when no one else is willing to trade. During sell-offs, a specialist tries to ensure that a stock’s price moves down in an orderly way, without huge price gaps between transactions. Specialists usually deal with big blocks of stock. Smaller orders are handled through a computerized trade-matching system.