Review: Aurinia’s stock plunges after big share offering at deep discount

It’s really easy to forget the underlying purpose of the stock market. Everyone always looks at it essentially as a horse race or a measure of how well a company is doing.

But the reason the stock market exists is for companies to raise money. That’s the whole point of issuing (in other words, selling) shares to the public. They are selling ownership in the company to raise capital.

Now, the only information I know about Aurinia is what I’ve read in this article. It looks like they’ve been doing pretty well for themselves lately, and they decided to take advantage of their stock price and do a secondary offering. And they sold a lot.

They were able to raise about $150 million (as a reference, this is just a little bit shy of two tons of $100 bills). This is all perfectly reasonable – the company wanted to raise money to fund their operations, and their stock price had been shooting through the roof. It would have been really weird if they didn’t take advantage of the situation.

What is weird is that the article seems surprised that the stock price dropped after the shares were issued. All sorts of signals (both good and bad) are embedded in a secondary offering, but even if we ignore those, just mathematically, the stock price should go down.

If the value of the company hasn’t changed, but the number of shares goes up, then the price of those shares should go down. The value of the company is just spread more widely.

And in this case, not only did they issue a big chunk of shares, they priced them at a pretty solid discount to what the stock was trading at (which makes sense since they were trying to sell so many shares).

It would be really weird if the share price didn’t drop.

But this gets back to the disconnect people have with the market. We get caught up in all of the “investing” stuff about the market, because that how we normally interact with it.

But the stock market doesn’t owe you a retirement. It’s just a market.

For more on thinking about what the markets mean, read our ebook A Minimalist's Guide to Understanding Financial Markets

 

McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.