Nov 7, 2014 What you will learn from reading Chapter 5 of “Why Stocks Go Up and Down”
Chapter 5 is titled “Going Public – Primary and Secondary Offerings”. After 4 chapters of business formation, accounting, income statements and balance sheet, we are now ready to put that aside and focus on stock offerings. Before we describe the process of going public, however, there is a lot of terminology and language usage that investors need to know.
In all the years I taught investments, no topic created as much confusion in investor’s minds as the difference between public and private stock offerings, and between primary and secondary and follow-on offerings. These distinctions are of immediate importance if you own stock in small rapidly growing company that could reasonably be expected to do a stock offering to raise money to maintain its growth. When an already-public company announces a stock offering, the stock often declines quickly by about the same percentage as the expected dilution. (You will understand exactly what this means after reading Chapter 6). On other occasions, a company announces a dilutive stock offering and the stock goes up, rather than down. Why does this happen? Most likely because the stock offering was anticipated, and when it was finally announced, the dilutive effect of the offering turned out to be less than had been expected. (Again, readers will learn how to do this dilution calculation in Chapter 6.) But first, in Chapter 5, it is important to become clear on the distinction between public and private offerings, and primary and secondary offerings. This is fundamental to investment education and we are surprised it is covered so poorly, if at all, in other investment books we have seen. (For this material, also see my blog post of July 24, 2014 titled: Investment Education – Primary and Secondary offerings)
Chapter 5 also explains a lot of terminology and language usage that investors will see relating to offerings. These include: S.E.C. Registration, S-1 form, Registration exemptions including Rule 144 and Rule 144A (which is not like Rule 144), Regulation S, Shelf Registration, Prospectus and Prospectus Supplement. These are in addition to Primary, Secondary, Follow-on, Private, and Public. All this material is descriptive, not at all mathematical, and just needs to be clearly explained. When these are understood, a lot of important investor education falls in place.
When I am teaching my investments class, the chapter 5 lecture evokes more “aha’s” than other classes. Many a student has told me after class that this material cleared up misunderstandings for which he or she did not know what question to ask.
In the prior blog post (about Chapter 4), I said that it was not critical that readers immediately memorize the calculation of each ratio in that chapter. That does not apply to the Private/Public and Primary/Secondary material in Chapter 5. It is important that you understand these distinctions clearly. If you do, you do not have to memorize it, you already know it.
Excerpts and comments about other chapters will be posted. If you want a preview of what is covered in the book immediately, or if you want to learn more about investment education, please visit our website at www.whystocksgoupanddown.com and click on Contents or Blog.
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