How can a company raise money on the stock market without relying solely on loans? The capital offerings/actions They help answer that question, but they can also change shareholder ownership and the perceived value of the business.
To understand the process, it is important to distinguish between fundraising in the primary market, trading among investors, subscription rights, dilution, and risks. This guide outlines the offering process and the precautions to take before deciding to participate.
How Capital/Stock Issuances Work
Equity offerings occur when a company decides to issue and distribute new shares to raise capital. The money received is added to the company's cash balance, in accordance with the terms disclosed in the offering.
This dynamic differs from the secondary market. When an investor buys shares from another investor on the stock exchange, the money typically goes to the seller, not to the company. No new capital is raised in that transaction.
In capital/stock offerings, the process typically begins with a corporate decision, approval in accordance with applicable rules, determination of the structure, and disclosure of documents. This is followed by the distribution of the securities to investors.
Official documents provide information on quantity, price, deadlines, target audience, risks, and allocation criteria. Shareholders should monitor announcements from the company, from the CVM and the intermediary institution.
Why does a company increase its capital?
A company may seek funding to finance a factory, open stores, invest in technology, acquire another company, or accelerate a project that requires capital before it generates revenue.
It is also possible to use the proceeds to reduce debt, strengthen cash flow, or improve the financial structure. In capital/stock offerings, the use of the proceeds is just as important as the price offered to the market.
Fundraising is not automatically positive or negative. The effect depends on the business’s ability to turn that money into growth, profit, cash flow, and a return commensurate with the risks.
Imagine a company with 100 million shares and annual profits of 20 million reais. If it raises 100 million for a project that will increase profits by 8 million, the result may justify the expansion.
On the other hand, if 50 million new shares are issued and the additional profit does not materialize, the earnings per share may drop. In our tests with this type of account, the destination of the funds completely changes the interpretation of the offer.
Therefore, when it comes to capital/stock offerings, it is worth comparing the announced plan with the track record of execution, the project timeline, and the previous financial situation. Promises of growth are no substitute for measurable results.
Types of Offerings and Investor Participation
In capital/stock offerings, the primary offering involves new securities created by the company. The proceeds from this offering go into the company’s cash reserves and can be used to finance the objectives described in the documents.
A secondary offering, on the other hand, involves shares owned by a selling shareholder, such as a controlling shareholder or major investor. In this case, the company generally does not receive the proceeds from the sale.
This difference affects the analysis because only a primary offering increases the number of shares outstanding and directly boosts the company's cash position. A secondary offering may increase liquidity, but it does not represent new corporate capitalization.
Here's how the structures compare:
| Structure | Source of the papers | Use of Funds | Effect on cash flow | Investor Participation |
|---|---|---|---|---|
| Initial Public Offering | New Stocks | Broadcasting company | Increases cash on hand | You may participate in accordance with the terms of the offer |
| Secondary Offering | Existing Actions | Selling shareholder | It does not directly increase cash on hand | Buy paper from a seller |
| Mixed offer | New and existing shares | Company and selling shareholder | Cash on hand increases slightly | It depends on the published structure |
The prospectus provides information about the offering, the risks, the company, factors that may affect the investment, and the use of proceeds. Subsequent announcements may update the timeline and terms.
O primary market This is the market in which the company receives funds from the issuance. Subsequent trading, however, takes place on the secondary market, where prices are determined by supply and demand.
Who conducts research How an IPO Works This refers to a company’s initial public offering (IPO), which typically involves a primary, secondary, or mixed offering. A new offering by a company that is already listed follows a similar process, but it is not necessarily an IPO.
To learn more about the role of institutions that structure and distribute assets, see the guide on underwriting. The material helps readers understand brokerage without turning the offer into a recommendation to buy.
Subscription rights and dilution risk
The right of first refusal or subscription right allows certain shareholders to retain, in whole or in part, their stake in an offering. It is typically based on the shareholding position as of a specified date.
In capital/stock offerings, the offering document specifies the ratio, the price, the exercise period, the brokerage firm’s procedures, and the conditions for trading or transferring the right, when permitted.
For example, suppose you own 1,000 shares of a company with 10,000 shares outstanding. Your ownership stake is 10%. The company issues another 10,000 shares.
If you do not purchase any new shares, you will continue to hold 1,000 shares, but they will now represent 5% of the total. This percentage decrease is known as dilution of ownership.
Dilution does not automatically mean a loss of money. The value of your position will depend on the stock price, the company's earnings, the terms of the offering, and the market's reaction.
In capital/stock offerings, investors can choose from three options: exercise the right, sell the right when trading is authorized, or forgo it. Each option has its own time frame and rules.
See also What Is a Stock Subscription? before filling out any order. In actual transactions, missing the deadline may prevent the exercise of the option, even if the shareholder intended to participate in the offering.
Details should be confirmed in the material fact announcement, the notice to shareholders, the prospectus, and the brokerage firm’s channels. Do not assume that one offering will have exactly the same rules as another.
How to Analyze a New Issue
An interim analysis begins with the purpose of the fundraising. For equity offerings, ask whether the funds will be used to finance expansion, reduce debt, provide working capital, or meet an emergency need.
Next, compare the price per share with the market price, keeping in mind that a discount may reflect risks, low demand, or an urgent need for cash. A lower price, on its own, does not prove that an opportunity exists.
The number of new shares also warrants attention. The larger the issuance relative to the existing total, the greater the potential impact on earnings per share and on the stake of those who do not keep up.
In our studies, we have observed that the same amount of funding may seem reasonable or excessive depending on the company’s debt, profit margin, and cash-generating capacity.
Use the questions below to organize your reading of the documents:
- Purpose: What exactly will the money be used for, and by when?
- Price: Does the offer price make sense given the current market price and the company's fundamentals?
- Dilution: How many new shares will be created relative to the current ones?
- Results: Does the company expect an increase in revenue, profit, or cash flow?
- Indebtedness: Will the funds raised reduce financial obligations or finance new expenditures?
- History: Has the administration delivered on the projects and goals it previously announced?
- Risks: What negative scenarios are described in the prospectus and press releases?
Consider a company with 1 million shares, of which you own 10,000. Your ownership stake is 1%. If 500,000 new shares are issued and you do not participate, your stake will drop to 0.67%.
In capital/stock offerings, investors should also estimate the effect on earnings per share. If earnings grow at a slower rate than the number of shares issued, each share may represent a smaller portion of net income.
For operational information on publicly traded companies and trading, see the B3. Even so, the decision requires a review of the specific documents, not just the trading page.
Precautions Before Participating in the Offer
Before placing an order, read the material fact statement, the prospectus, and the timeline. For equity offerings, the cut-off, reservation, settlement, and results announcement dates may determine whether your order will be accepted.
Also check brokerage fees, service charges, fees, and any taxes that may apply to the transaction. The financial institution must provide the terms and conditions, but investors need to verify the amounts on their own.
It is important to consider whether an investment aligns with your goals. A stock investment may be highly volatile, whereas money set aside for an emergency fund needs to be readily accessible and less prone to fluctuations.
In equity offerings, concentration in a single company amplifies the impact of news, lower-than-expected results, and changes in management. Diversification does not eliminate risk, but it reduces dependence on a single asset.
There is also a risk of changes in the use of proceeds, project delays, the need to raise additional capital, and a decline in the share price following the offering. The stock may trade below the offering price even after the transaction has been completed.
Also compare the offer with available alternatives. An apparent discount may not be worth the high debt, weak governance, inconsistent track record, or uncertainty about the project’s return.
Content on environmental, social, and governance criteria can complement this assessment, such as the article about ESG investments. Use it to supplement your analysis, not to replace the offering documents.
In offerings of preferred or common stock, consider voting rights, liquidity, and differences between classes. Specific terms should be confirmed in the official offering materials and with the brokerage firm handling the offering.
From the offering to post-investment monitoring: what’s in it for the investor
The capital/stock offerings They can finance growth, restructure debt, or simply bolster cash reserves. Investors need to weigh price, dilution, the use of proceeds, and the company’s ability to execute.
Before participating, review the documents, deadlines, costs, risk profile, and alternatives. To better understand how offers are structured, visit the guide at market underwriting and proceed methodically.
This content is for educational purposes only and does not constitute an investment recommendation. Consult a certified financial advisor before making any decisions.
Frequently Asked Questions About Capital/Stock Issuances
What are capital/stock offerings, and how do they work?
Equity/stock offerings occur when a company issues and distributes new securities to raise capital. The proceeds go into the company’s cash reserves, in accordance with the disclosed terms. The process involves corporate approval, defining the offering, publishing documents, and distributing the securities to investors.
How can a shareholder participate in a stock offering?
Shareholders should monitor announcements from the company, the CVM, and the underwriter to learn about the price, deadlines, quantity, target audience, and allocation criteria. When preemptive rights are available, shareholders may purchase new shares under the terms and within the period specified in the offering.
What benefits does a company seek by raising capital?
A capital increase can finance factories, stores, technology, acquisitions, and expansion projects. It can also reduce debt or strengthen cash reserves. The benefit depends on the ability to convert the raised funds into growth, profit, cash flow, and a return commensurate with the risks.
What is the difference between a primary offering and a secondary market transaction?
In an initial public offering (IPO), the company issues new shares and receives the proceeds from the offering. In the secondary market, an investor buys shares from another investor on the stock exchange, and the money typically goes to the seller. Therefore, secondary trading does not represent new capital for the company.
Is it true that every stock offering harms shareholders?
Not necessarily. The offering may dilute shareholders' stakes, especially when a large number of shares are issued, but its effects depend on how the proceeds are used. If the project generates sufficient profits and cash flow, the expansion may offset the dilution; otherwise, earnings per share may decline.
