Several times, we have heard or read about corporate actions
by a company. But, what exactly is a corporate action?
When a company calls for a corporate action, it sets off a
process that will cause a change to its stock. It is also important and
necessary to know a company’s chosen corporate action, as there are various
types.
What is a corporate action?
As stated above, corporate actions are any event that results
in a change to a company. It usually has a material impact on its stockholders,
common and preferred, as well as bondholders.
Investors must clearly understand what a corporate action is
suggesting about a company’s financial state and how will it affect its share
price and performance.
By learning this, investors will be able to decide whether to
buy or sell the stock being considered.
Corporate actions are generally approved by the company’s
board of directors. Shareholders could also vote on some occasions.
Types of Corporate Actions
Stock Splits
Also known as a bonus share, a stock split divides each of
the company’s outstanding shares. The amount of those shares is then elevated
by a particular multiple, while the price per share drops by the corresponding factor
of the multiple.
This is done to introduce liquidity and to lower share prices
for investors unable to acquire those shares previously due to high prices.
Cash Dividends
Cash dividend is a common as well as a straightforward type
of corporate action. Cash dividends are simply cash payments made to the
shareholders of the company.
For each share an investor holds, a specific amount of money
is allocated to each shareholder. If an investor has 100 shares and the board
of directors announces a $0.10 dividend per share, then the investor will
obtain an overall of $10.
Mergers and Acquisitions (M&A)
A merger occurs when two companies join together to form one
new entity, while all participants involved mutually agree to the conditions of
the merge.
An acquisition, on the other hand, is when one company
purchases another business. The buying corporation will then be given the
choice to either absorb it into the parent organization, or run it as a
subsidiary.
The outcome of both actions are the same, but the
relationship between the two companies may differ depending on the merger or
acquisition that took place.
Know how to get started in stock market here at FSMSmart. Open
an account today and learn
how to trade forex.
