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STOCK SHARES: PRIMARY VS SECONDARY OFFERINGS
The former involves the direct sale of primary shares in a primary market, as the titles would imply, and the latter involves the secondary sale of secondary shares in a secondary market.
There are typically two ways to approach a company’s sale or purchase of equity. A corporation may choose to issue new shares in a primary offering or sell already issued shares held by current shareholders in a secondary offering.
The seller and buyer should be aware of significant distinctions that impact both sides of the transaction when deciding which kind to pursue. Therefore, let’s examine the what, how, why, and when of both transaction kinds in more detail.
PRIMARY SHARES OR OFFERING
Primary shares in an equity offering are newly issued shares of common stock. As a result, any current shareholders’ ownership position in the company is diminished when primary shares are issued and sold to a third party in what is frequently referred to as a “primary” short for a direct sale. The revenues from the sale of primary shares go to the issuer or the corporation and not to any of the stakeholders directly.
Let’s use the example of a corporation with 1,000 shares that are divided between two co-founders, each of whom holds 500 shares, or 50% of the company’s equity, to demonstrate these ideas. They could issue 250 new shares and sell them to the new business partner in a primary transaction if she wanted to invest $250k in the company in exchange for 20% ownership.
Each co-ownership founder’s stake in the company would be reduced by 10% as a result. Given that they each currently own 500 out of the 1,250 post-issuance shares, they would each effectively hold a 40% net stake in the company following the sale. However, their company would now have access to a quarter million dollars. When contrasted with the selling of secondary shares, this is a crucial point to keep in mind.
SECONDARY SHARES OR OFFERING
Secondary shares in an equity offering are current shares of common stock sold to a third party, most frequently by existing shareholders. The shares are sold second-hand, as the name suggests, meaning someone holds them before selling them in what is known as a “secondary” short for a secondary sale. In this way, the shareholders who sell them will benefit from the sale’s proceeds.
SELLING SHARES OF THE MARKET PUBLIC VS PRIVATE
Whether an investor buys primary or secondary shares, they must decide which market they wish to participate in. Notably, there are significant distinctions between public and private markets.
Buyers can provide growth capital to enterprises in private markets by purchasing primary shares or secondary shares of private company stock from the existing owners. Seller expectations for the latter include more than just capital.
Additionally, investors should purchase primary shares if they want their money to work for the company. This is a classic tactic used by growth investors investing money in early-stage startups and underperforming companies requiring capital infusion.