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I understand that when a company issues more shares it causes dilution and a potential drop in share prices depending on the circumstances. My question is more about the mechanism in releasing these new shares to the market.

Let's say Bio Company A has 300M shares outstanding and announces that they are going to add 30M more to help fund R & D. Will these new shares be dumped on the market all at once, do they get tricked out, or is there some other way to get these on the market? I cant seem to find a clear answer to this anywhere.

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From Investopedia:

A secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO). There are two types of secondary offerings. A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.

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Non-Dilutive Secondary Offerings

A non-dilutive secondary offering does not dilute shares held by existing shareholders because no new shares are created. The issuing company might not benefit at all because the shares are offered for sale by private shareholders, such as directors or other insiders (like venture capitalists) looking to diversify their holdings. Usually, the increase in available shares allows more institutions to take non-trivial positions in the issuing company, which may benefit the trading liquidity of the issuing company's shares. This kind of secondary offering is common in the years following an IPO, after termination of the lock-up period.

Dilutive Secondary Offerings

A dilutive secondary offering, also known as a follow-on offering or subsequent offering, is when a company itself creates and places new shares onto the market, thus diluting existing shares. This type of secondary offering happens when a company's board of directors agrees to increase the share float for the purpose of selling more equity. When the number of outstanding shares increases, this causes dilution of per-share earnings. The resulting influx of cash is helpful in achieving the longer term goals of a company or it can be used to pay off debt or finance expansion. Some shareholders shorter-term horizons may not view the event as a positive.

A dilutive secondary offering usually results in some sort of drop in stock price due to the dilution of per-share earnings, but markets can have unexpected reactions to secondary offerings. For example, in January 2018, the stock price of CRISPR Therapeutics A.G. saw a one-day increase of 17 percent after the company announced a secondary offering. Although the exact reason for the rapid increase can't be known for sure, analysts suspect it was because investors thought the announcement signaled something greater in the future, perhaps related to the company's plans to use the additional capital to fund further clinical development.

  • Thanks for the cut and paste, but as I mentioned I understand this. My question is, are the 30Million shares dumped on the market all at one moment? If the daily trading volumes are well below this number I just don't understand why the price wouldn't hit the floor if that were the case. So what am I missing? – Mo Ali Feb 12 at 20:07
  • You're welcome for the cut and paste. As I mentioned, if it's a non-dilutive offering, shares are just changing hands and there is likely to be no effect on share price. If dilutive, the company doesn't just 'dump' shares on the market. The secondary offering is somewhat like an IPO where underwriters offer the shares to investors. The secondary offering tends to be priced below current price in order to attract investors. Subsequent share price will depend on how the market views the secondary (amount of dilution, corporate insiders bailing?, etc.) – Bob Baerker Feb 12 at 20:28

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