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In the world of stock markets, there’s a term that you will hear regularly that is – Corporate Actions.
To begin your share market journey, a good understanding of the corporate actions can help you to generate more value from the market. Investing in the stock market demands an insight into the company. Corporate actions aren’t just company matters, it has a direct impact on you as a shareholder.
Let’s dive into, what corporate actions are and how they can impact your investment journey.
What are Corporate Actions?
Corporate actions are decisions made by a company’s top leaders (board of directors) that can impact the company’s assets and stock value. These decisions are then approved by the company’s owners, known as shareholders.
When a company takes corporate action, it can influence the stock price. If you own shares in a company, you should understand how these actions could affect your investment. By paying attention to corporate actions, you can learn about a company’s plans and financial health.
Types of Corporate Actions & their Impact:
Corporate actions can influence the stock price, either positively or negatively. Let’s explore the most common types of corporate actions and how they can impact share prices
1. Dividends
Suppose you own shares in a company. When that company makes a profit it might decide to share a portion of those earnings with its shareholders. This part of the profit is called a dividend.
Example: Let’s say you own 100 shares of a company and they decide to give a dividend of Rs. 5 per share. That means you would receive Rs. 500 (100 shares x Rs. 5 per share) as a dividend.
Dividends are a method for companies to reward their shareholders for investing in them. It’s like a little bonus for being a part owner of the company. Remember not all companies pay dividends and the amount can vary depending on how well the company is doing.
Dividends are given out at specific times, like every three months (quarterly) or once a year. The company decides during the Annual General Meeting (AGM) meeting when to pay the dividends.
Sometimes, young and fast-growing companies don’t pay dividends. Instead, they use the money to grow even bigger. Some companies prefer to use their profits to grow even more. But when a company is more mature and has extra cash, it might start sharing some of it with shareholders.
Let’s break down the dividend cycle through the following timeline.
- Dividend Declaration Date: When a company reveals its plan to distribute dividends to its shareholders, it’s called a dividend announcement. It also specifies the date of the payment and the dividend amount. This amount can be stated in terms of currency or as a percentage.
- Ex-Dividend Date: The ex-dividend date is an important day for investors, generally set two business days before the record date. To be eligible for the next dividend payment, you must buy shares of the company before this date. This rule aligns with India’s T+2 equity settlement system, where stock delivery and record updates take two business days. If you purchase company stocks after the ex-dividend date, you won’t qualify to receive the upcoming dividend.
- Record Date: This is the day when the company reviews its list of eligible shareholders for the dividend. It comes about 30 days after the dividend is announced. On this day, the company checks its list of eligible shareholders for the dividend. If your name is on that list, you’re eligible for the dividend. But if you buy shares on this day, you won’t get the dividend. This is because it takes two business days for settlement. So, make sure you’re on the list before the record date, if you want to receive the dividend.
- Dividend Payment Date: A dividend payment date is when a company distributes dividends to its registered shareholders. This is the last stage in the process of giving out dividends.
2. Rights Issues
When a company offers a rights issue, it’s giving existing shareholders a special opportunity to buy more shares at a lower price. Think of it as the company’s way of saying, Hey, you’ve been with us, and we want you to be part of our growth.
Let’s break it down with an example: If a company announces a rights issue of 1:3, it means for every three shares you own, you can grab one more at a discount.
This helps the company raise money, like the company’s way of refreshing its funds by going back to its loyal shareholders. Picture it as a sequel to its initial public offering (IPO), but this time, it’s an exclusive show for a special crowd.
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3. Bonus
Think of a bonus issue as a special gift from a company to its shareholders. Instead of paying in cash like regular dividends, the company gives additional shares to its shareholders. These bonus shares are like a thank-you gift to the shareholders.
If a company announces a bonus of 2:1, it means that for every two shares you have, they’ll give you one more for free. So, if you have 100 shares, after the bonus, you’ll have 150 shares, but the total value of your investment will remain the same but you’ll have more shares.
Similar to the dividend, there is a bonus announcement date, ex-bonus date, and record date.
4. Stock Split
Have you ever heard of “stock split”? It might sound strange, but it’s quite common in the market. It’s like your shares are getting a makeover! Companies do this to make their shares more tradeable to smaller investors and easier to trade.
Imagine you own one share of a company, and that share is worth ₹100. If the company declares a 1:2 stock split, After the split, you’ll have two shares, but each will be worth ₹50. In total, your shares are still worth ₹100 but now you have two shares, each worth Rs 50, It’s like breaking your note into smaller denominations, making it easier to trade.
5. Bonus vs. Split:
In a bonus, the company’s face value stays the same but in a stock split, the face value changes.
The important dates for stock splits (announcement, ex-date, record date, etc.) are similar to those for dividends and bonus issues.
6. Buyback of shares
When a company announces to buy back its own stock, it’s a sign of its trust in its future, this is usually positive for the share price. Companies do this to prevent takeovers, demonstrate trust in their business, and signal their confidence in the company’s future.
Buyback helps companies gain full control, keep the share price from dropping, increase earnings per share, or build investor trust in the promoters. It’s like a company investing in itself by buying back shares from other people in the market.
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7. Mergers & Acquisitions
The terms “mergers & acquisitions” are often used interchangeably but there is a subtle difference between them. “Mergers” and “Acquisitions” are used by companies to gain strength, expand their customer base, cut competition, or enter into new markets. Mergers and acquisitions can affect the stock prices of the involved companies.
In general, the stock price of the target company tends to rise, when a merger or acquisition is announced, as investors anticipate the benefits of the deal.
Now, let’s look into what mergers and acquisitions are:
- Mergers
Mergers are the ultimate partnership move in the business world. When two or more companies team up to become one big company, they agree to work together under shared rules. In this process, companies bring together their strengths and resources, and they issue new stocks that represent the newly united company. This strategy enables them to combine their efforts and grow collectively. They can save money make things work better together, and even make the company more profitable.
In the world of the stock market, during a merger, new stocks might be issued.
For example, when Vodafone and Idea merged, they formed a new entity called VI.
Another example is the merger of Glaxo Wellcome and SmithKline Beecham which later became GlaxoSmithKline.
- Acquisitions
Acquisitions are when one company buys another to become bigger and more powerful. It’s like joining two puzzle pieces to make a bigger picture. The company being bought gets a nice payout, and the one doing the buying gets even stronger. This helps companies grow and do more things. The acquisitions allow the purchasing companies to expand their reach and capabilities by integrating the acquired companies into their existing structures.
Unlike mergers, acquisitions generally do not issue a new stock.
For example- Walmart’s acquisition of Flipkart, Tata Motors’ acquisition of Jaguar Land Rover, and Tata Group’s acquisition of Air India are instances. Where existing stocks continue to be traded without new ones being issued.
8. Spin-Offs
A spin-off is when a company creates a new, independent entity from one of its existing divisions. When a subsidiary is separated from its parent company, it takes various assets, including employees and technologies. The value of these assets is determined by a mutually agreed-upon price.
There are many reasons, why a company might decide to do a spin-off. Here are a few:
- To focus on its core business. A company might decide to spin off a division unrelated to its core business, this can help the company to focus on its core strengths and improve its profitability.
- To unlock value. A company might decide to spin off a more valuable division as a separate company. This can happen if the division grows faster than the rest of the company or has a different set of customers.
- To raise capital. A company might decide to spin off a division to raise capital and this can be done by selling shares in the new company to investors.
Spin-offs can be a good thing for both, the parent company and the new company. The parent company can now focus on its core business, as well the new company can have the freedom to operate independently.
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Conclusion
In the stock market, corporate actions are important events that affect companies and investors. Understanding these actions is key because they impact your investments and give you insights into a company’s plans and financial health in the ever-changing world of the stock market.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
