Primary Offering: What it is, How it Works

What Is a Primary Offering?

A primary offering is the first issuance of stock from a private company for public sale. The first public sale of stock is called an initial public offering (IPO). It is a means for a private company to raise equity capital through financial markets to expand its business operations. A primary offering can also include debt issuance.

Understanding a Primary Offering

Primary offerings are usually a way for a growing company to raise financing to expand its business operations, but they are also conducted by mature private companies. After the offering has been submitted and the funds have been received, securities are traded on the secondary market. 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 changes from private to public and is registered with the Securities and Exchange Commission (SEC). The SEC requires corporate issuers of primary offerings to file a registration statement and preliminary prospectus that must contain the following information:

• A description of the issuer's business
• The names and addresses of the key company officers with salary information and a five-year business history for each
• The amount of ownership of key officers
• The 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 have received an allocation. Demand for IPO stocks often overwhelms supply because IPO stocks can surge, 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 will sometimes 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.