Question

Why is the price for a share in a subsequent offering always lower than the "current" share prize? Please explain thoroughly.

Answer 1

When the company goes public in the primary market for the first time, it is called an Initial Public offer (IPO). An subsequent issuance of shares to investors by a public company that is already listed on a stock exchange is called an Follow-On Public Offer (FPO).It is a popular mechanism by the companies to raise additional equity capital.The two main types of FPO's are Dilutive and Non Dilutive. In the dilutive FPO, the company issues fresh share capital resulting in an increase in the number of shares outstanding.

In the Non-Dilutive Offer, the promotors sell off privately held shares.With a non-dilutive offer, all shares sold are already in existence. Commonly referred to as a secondary market offering, there is no benefit to the company or current shareholders.

Generally the price for a share in subsequent offering is always less than the "Current " share price because if it is offered at a price which is equal to or more than the current trading price of the shares in the stock exchange then no prospective investor would subscribe to it since the moment it is listed, the law of demand and supply will lower down the share price since now the number of shares available for trading increases and the share price would come down to adjust the market capitalization of the company.

Hence it is offered at a lower price than what it is trading at to attract investors.