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An Updated Guide to Trading Secondary Offerings

Cramer on Tuesday explained why secondary offerings have come to be such opportunities to profit, and then he taught viewers how to trade them. Here’s the step-by-step guide:

First, some ground rules. You don’t need to like the company that’s holding the secondary. As Cramer said, in these situations the most important thing is the price where the stock is being offered, not what is being offered. This is a trade, so the goal is to turn a quick profit. That being said, these secondaries can on occasion give you the chance to buy longer-term investments at a discount.

And, of course, the requisite homework must be done, too, because not all secondaries are worth buying. You can’t assume that because the last one worked the next one will as well. Still, there is a lot to be learned from offerings that came before, Cramer said, because so many of them have generated such spectacular returns.

OK, to start, keep an eye out for any coming secondaries. Cramer recommended having a full-service broker watching for you, though it is possible to play them on your own through an online broker.

Then look for offerings priced at a discount to the stock’s last sale. Ford , for instance, priced its secondary at $4.75, or about $1.50 below its trading price the week before. This is important because even the worst stocks often times are attractive when the price is right.

At this point, you have to gauge demand for the offering. If the deal is too hot, then you probably can’t get your hands on enough stock to make buying worthwhile. At the same time, if demand is low then the stock won’t pop as desired. To know if the deal is just right, Cramer said to rely on a full-service broker. He/she can check on demand, the number of buyers and how much interest is being generated at a certain price level. At the right price, brokers will know that institutional buyers are in on the secondary and will keep buying in the open market.

Watch for these magic words from your broker, Cramer said: The deal is “tight as a drum, no flippers.” That means the only real buyers are institutions who have pledged to hold the stock.

Even then you never buy an entire position at once. There’s always the chance that the secondary won’t go as well as you’d expected. So buy half your position and then wait to see if the stock “breaks” the print price, or drops below the offering price. That can happen when a stock hasn’t been “softened” enough, which means there are still shareholders that want to sell. You want only bullish investors in on the deal.

Lastly, you want to make sure the company’s broker will support the “bid” by buying the stock itself to stabilize the market. This is the practice of keeping the share price at a certain level until other buyers come in. Again, a full-service broker will let you know how much support a stock has.

Cramer emphasized again and again how important a broker is when trading secondaries. So much so that you might want to pass on them unless you have one to help you. But if you have the help, the price is right and all the previously conditions have been met, “Then, my friend, you have a secondary you need to get in on,” he said.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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  • Jim Cramer is host of CNBC's "Mad Money" and co-anchor of the 9 a.m. ET hour of CNBC's "Squawk on the Street."

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