Selling new stock to investors to raise capital is called a secondary offering. When a secondary offering is announced, the stock price usually drops. The most typical reasons are dilution, investor perceptions and company actions surrounding the offering.
When a company issues new stock, it increases the number of shares outstanding. Its earnings per share go down because the same amount of net earnings must now be divided by more shares outstanding. Investor stakes and share values are diluted. The larger a secondary offering, the greater the dilution.
Topping Stock Price
A company’s goal is to raise as much money as possible at minimal cost. The higher the stock price, the fewer shares a company must sell to raise the same amount. Since insiders know their companies better than anyone else, investors believe that secondaries often take place when the stock price is as high as it can get and start selling to lock in profits, pushing the stock price down.
If the offering price is significantly below the current stock price, investors who paid higher prices for their shares feel short-changed by the management, sell the stock and stay away from it. If a company loses investors' trust, its stock may languish for a long time as disgruntled investors stay away from it.