Corporate actions are taken up by corporate entities that bring a change to their stock. There are numerous sorts of corporate actions that can be started. Corporate actions have to be approved by the company’s investors and initiated by the board of directors of the company.
A decent understanding of these corporate activities helps us decide whether to buy or sell any stock and gives a clear picture of the company’s financial health.
Let’s look into the five most important corporate actions and their impact on stock prices.
Corporate Actions – Dividends
Shareholders are paid dividends by companies. It is paid on a per-share basis to disseminate the profits made by the organization during the year.
It isn’t required to deliver out dividends every year. If the organization feels that they better use the same money to finance another undertaking for a superior future, they can do as such. Moreover, the profits need not be paid from the benefits alone.
If the company holds a sound money reserve despite making losses during the year, it can still pay dividends from its cash reserves. It can be issued in cash, shares, or any other form. The choice to deliver dividends is taken in the Annual General Meeting (AGM) during which the heads of the organization meet.
Corporate Actions – Bonus Issue
Companies reward their shareholders by allotting bonus issues. The bonus shares are given out of the reserved shares of the organization. These are free shares that the investors get against shares that they as of now hold.
Bonus shares are issued by organizations to encourage retail participation particularly when the share prices are extremely high and it gets intense for new investors to buy shares. Bonus shares help in reducing the value of each share.
Corporate Actions – Stock Split
When a stock split is declared by the organization, the number of shares held increments yet the market capitalization stays as before. Stock split divides existing shares into multiple shares.
A stock split is normally to encourage more retail investment by decreasing the worth per share. Increasing shareholder base, liquidity, etc are some of the reasons for it.
Corporate Actions – Rights Issue
The thought behind a rights issue is to raise new capital. However, rather than going public with an IPO, the organization moves toward its current investors. Think about the rights issue as a subsequent IPO however for a select gathering of individuals (existing investors). The rights issue could be a sign of promising new advancement in the organization. The investors can buy into the rights issue to the extent of their shareholding.
A rights issue is not quite the same as a bonus issue as one is paying cash to gain shares. Consequently, the investor should only buy when they are completely convinced about the fate of the organization.
A buyback can be viewed as a technique for an organization to put resources into itself by purchasing shares from other shareholders in the market. The organization can buy the shares directly from the shareholders in an open market. It is usually at a higher price than the market. Buyback of shares is a significant strategy for corporate restructuring. When an organization reports a buyback, it flags the organization’s trust in itself. Buyback increases the percentage of shares the company owns by reducing the number of shares in the market.