Secondary offering drops

Q:

A company in which I’m invested has announced a “secondary offering,” and shares dropped some after the announcement. Is this bad news? — C.F., Batavia, N.Y. A:

Not necessarily. To start, understand that an initial public offering, or IPO, is when a company first issues shares that will trade on the public market. At the IPO, the company receives money from selling these shares. Afterward, when shares are bought and sold between investors, the company doesn’t participate in or profit from those trades. A secondary offering is when the company offers additional shares on the open market at a later date.

There are two main kinds of secondary offerings. In one, the company seeks to raise more money, so it creates and sells more shares. That can help the company, which can be good for shareholders. But it can also hurt shareholders because creating new shares dilutes the value of existing ones. Imagine a pizza: If it’s cut in four equal pieces and you own one, you own a quarter of it. But if it’s suddenly cut into eight equal pieces, your piece of the pie is now smaller.

Another kind of secondary offering is when shares that already exist are sold into the market. Insiders or private equity firms, for example, may own millions of shares, and will occasionally sell some to raise money. This doesn’t dilute existing shares’ value, though it might indicate pessimism on the part of an insider.

Q:

What’s the “big board”? — S.L., Bremerton, Wash. A:

It’s how some people refer to the New York Stock Exchange, America’s oldest, which was created by 24 businessmen gathered under a buttonwood tree on Wall Street in New York City in 1792.