How to Trade Stocks: Profiting from Companies' Transactions with Their Own Stock

Lockup Expiration - When a company sells shares in an IPO, insiders are precluded from selling their holdings for 6 months. When the lockup expires, a new supply of stock comes to the market as insiders rush to cash in their paper profits, pushing down the stock price.

Secondary Offerings

Bulls often interpret a secondary as a net negative:

(a) a company would only be selling stock if it feels it can get top dollar, i.e. the stock price has peaked;

(b) a secondary may be an indication that the company is bleeding cash, i.e. it cannot fund its operations from the internal cash flow;

(c) insiders are anxious to sell, i.e. they know something you don't.

Shelf Registration

Since a secondary can depress the stock price, a company can file a shelf (registration) that allows it to sell securities (stocks and bonds) from time to time, depending on market conditions, up to a certain amount. Again, the prospect of more shares hanging over the market deters traders until the securities are fully issued.

A particularly bad sign is when a company prices its secondary below the current market price, for example: pricing the secondary at $7.00 when the stock is trading at $9.00. The company is either desperate to sell or it simply does not care about the existing shareholders. What would you do if you got a stock for $7.00 that is trading at $9.00? That's right, sell. Even if you sell for $8.00, you still make an instant profit. But if you are the one who bought at $9.00, you are screwed.

On the other hand, when a company successfully prices a secondary, it removes the supply overhang and traders rush in to buy the stock, pushing the price up.

Share Buyback

If secondaries' dilutive effect on EPS (same net earnings divided by more shares out) can depress the stock price, a share buyback can have the opposite effect (same net earnings divided by fewer shares out), boosting EPS.

Stock Splits

A company typically splits its stock (pays a stock dividend) when the price gets too high (to increase share affordability) or when it wants to increase the number of shares outstanding (to increase share availability). In a 2:1 split, an investor gets one new share for each one he owns. Accordingly, the stock price drops by 50%. So instead of owning 100 shares at $50.00, the investor now owns 200 shares at $25.00 - a wash.

Investors tend to view stock splits as a net positive, sometimes even as magic, on the premise that only rising stocks split. However, excessive stock splits historically often indicate a stock's top. Institutions like the initial stock splits as the increased float makes it easier for them to acquire more shares but they may start selling before a 3^rd or 4^th split because they feel the end of the run is near, and/or because it's cheaper to sell 500,000 shares at $50.00 than 1,000,000 shares at $25.00.