Secondary Offerings: What You Need to Know – Achillion Pharmaceuticals, Inc. (ACHN) and More

When private equity investors are involved, secondary offerings aren’t as big a cause for concern. Although the big blocks of shares cause temporary selling pressure, the offerings don’t dilute existing shareholders and have no impact whatsoever on the fundamentals of the business.

What can be problematic, though, is when corporate insiders sell out. For instance, when a founder sells shares, it can raise fears of a loss of confidence in the company going forward. Major executive sales, as Kors is going through with trusts controlled by CEO John Idol selling 2 million shares, can have the same impact.

How to handle secondary offerings
When a company whose stock you own does a secondary offering, your first move should be to figure out which type of offering is involved. If the company is issuing new shares and there’s a danger of dilution, make an assessment of whether you think the price the company will get for its shares reflects its fair value. If the company is getting a good deal, then it’s a positive sign. If it’s a fire sale, then beware.

On the other hand, if a secondary offering is helping existing major investors to reduce their positions in the stock, take a look at who’s selling out. The more of an insider the seller is, the more cause there is to wonder whether they see problems on the horizon.

Secondary offerings aren’t inherently bad, but they do require immediate attention. Understanding the motivation behind secondary offerings is essential in order to make the right move.

The article Secondary Offerings: What You Need to Know originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns shares of Central Fund of Canada. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.

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