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Ask TheStreet: Secondaries

Editor's Note: Ask TheStreet is designed to answer questions about the market, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment advice.

Are secondary offerings good or bad for stocks? Best Regards, J.P.

Gregg Greenberg: Strip away all the fancy ratios used to value stocks -- the price/earnings, price/sales, price/book, etc. -- and ultimately you will find the price of a stock is determined by good old supply and demand. If more people want to buy shares of a stock than sell them, then the price will rise. If more people want to sell than buy, then the price will fall.

Keeping those immutable economic laws firmly in mind, it stands to reason that by raising the supply of stock via a secondary offering, then the price should go down if demand remains unchanged. And on the flip side, if a secondary offering spurs additional demand, then the price should remain unchanged or rise.

Confused? Don't be. Here's a recent real world example using -- what else? -- everybody's favorite stock, Google (GOOG - Get Report).

Google went public in August 2004 at $85 per share. In the initial public offering, a total of 19.6 million Google shares were sold for $1.67 billion. At the time, demand outstripped supply, and the IPO finished above $100 on its first day of trading.

A year later, Google raised $4.2 billion through the sale of another 14.2 million shares, called a secondary offering. By this time, however, Google-mania was in full effect, and the highly anticipated secondary offering was priced at $295 a share.

Why did Google decide to add more shares to the market when the price was rising so well on its own?

In general, secondary offerings are made by companies looking to refinance, or raise capital, which is positive for a growing company. At the time, there was speculation that Google was building up a war chest to enter new markets. And since the price for its stock was high, Google's management realized it was a good time to sell more stock.
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