The Citigroup secondary offering yesterday, which went much worse than planned, is a prime example of the difference between primary and secondary markets. A lot of investors simply assume without thinking too much about it that a rising stock price is always a good thing for the company in question, and they’re right to do so. But there are two kinds of stock price, and sometimes it can be hard to tell the difference.
The first type, which is based on perceived fundamentals, is the price that investors are willing to pay to own a stake in the company over the long term. The second type, which is based on markets, is much more speculative, and is fundamentally a bet on what other people will be willing to pay for the stock in the short term.
If you have a type-1 stock, it’s pretty easy to sell new stock at or near the secondary-market price. If you have a type-2 stock, however, it can be very hard.
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