What Is a Seasoned Security?
A seasoned security is a financial instrument that has been publicly traded in the secondary market long enough to eliminate any short-term effects from its initial public offering. It also refers to any security that has been issued and actively traded in the Euromarket for at least 40 days.
- A seasoned security is one that has been trading in the secondary market long enough to have established some price and trading stability.
- Seasoned securities are less prone to the volatility often experienced by new securities after they are first offered through an initial public offering (IPO).
- Although planned and executed by underwriting firms in a similar manner to that of an IPO, seasoned security offerings are priced based on the price of already existing market shares.
- Seasoned security offerings from existing shareholders don't dilute the holdings of other existing shareholders, but offerings that create new shares do dilute their holdings by increasing the total amount of available shares.
Understanding Seasoned Security
When new securities are first offered through an initial public offering (IPO), they can exhibit substantial volatility immediately following their listing. Seasoned securities have already been on the market for a while, making them more predictable than newly-listed securities due to price and trading volume stability.
Seasoned Security Offerings
Seasoned security offerings are managed by underwriting firms in a similar way as initial public offerings. The difference is the pricing of the new shares is based on the market price of existing outstanding shares. Investors may interpret a seasoned security offering announcement as an indicator of financial problems. This news can cause the price of both the outstanding shares and the new shares to fall.
Seasoned security offerings that create new shares can considerably dilute the holdings of existing shareholders because it increases the total amount of shares on the secondary market. Seasoned issues from existing shareholders, however, do not dilute existing shareholders. That's why it's important to know who the seller of a seasoned issue is.
Seasoned security offerings from existing shareholders involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company. This is common in situations where a company's original IPO included a "lock-up" period, during which the founding shareholders were disallowed from selling their shares.
Seasoned security offerings, thus, are a preferable way for founding shareholders to monetize their positions. Seasoned security offerings may also signal that a company is running short on cash, so it's important for an investor to consider multiple angles of a company's financial health when considering buying into a seasoned security offering. Also, selling large volumes of shares—especially thinly traded shares—can create downward pressure on a stock's price.
Seasoned Security Offering Example
Consider Company ABC, a public company that wants to sell additional shares in a seasoned security offering in order to raise money for a new factory. To accomplish the goal, Company ABC hires an underwriter to handle the sale and register the offering with the SEC. When the sale happens, the company receives the funds from the sale of the securities.
Private investors can also create a seasoned security offering. In this type of seasoned issue, the private investor will receive the proceeds from the sale of the shares instead of the public company—but it also won't dilute outstanding shares.