When you track stock prices, most of the time you feel they move because of market trends or the performance of the company. However, that doesn’t always give you a complete overview of price movements. Sometimes, decisions directly made by the company impact their share prices. These decisions are known as corporate actions.
As an investor, it’s important to understand these actions as they can influence how the decisions affect stock prices in the short term. In this blog, we have explained different types of corporate actions and their impact on investors.
What are corporate actions?
Corporate actions refer to the decisions that a company makes, directly affecting its shareholders. Depending on the nature of the corporate action, it can change:
- The number of shares you hold
- The price of those shares
Sometimes, corporate actions even provide additional benefits like extra income. Usually, the management of the company announces these decisions, and then they are approved by the board.
Certain corporate actions are structural in nature. For instance, a company may decide to change the share count. However, others are financial, where investors receive dividends.
Common types of corporate actions
Bonus issues, stock splits, and dividend payouts are some of the most common types of corporate actions.
1. Bonus issue
At times, a company rewards its existing shareholders with additional shares at no extra cost. This is known as a bonus issue.
When you hold the shares of a company, it may offer these shares based on a fixed ratio. This increases the total number of shares you own.
2. Stock split
If you’ve ever wondered what is stock split, it indicates dividing existing shares into smaller units. For instance, a company can split a share into multiple shares of lower face value. The price of the shares decreases in the same proportion when their number increases.
The overall value of your investment remains the same after the stock splits. However, it increases liquidity and makes the shares more affordable. In the process, it becomes accessible to a wider group of investors.
3. Dividends
Usually, companies make payments to their shareholders through dividends, where the amount is transferred to their bank accounts. These dividends come from the profits made by the company, which it shares with its investors.
Many investors buy dividend shares to create a passive stream of income. Companies that pay regular dividends are often considered stable, and they are financially strong. Investors looking for regular income often include these shares in their portfolios.
How corporate actions impact investors
As an investor, it’s crucial to understand how corporate actions are likely to impact you.
1. Changes in share price and quantity
As a result of corporate actions, the price and quantity of shares in your portfolio may change. For instance, after a bonus issue or stock split, you may notice a higher number of shares in your portfolio. In case of a stock split, the price per share decreases.
2. Sentiment of investors and liquidity
Corporate actions can also influence how investors perceive a company. For instance, announcements like bonus issues or stock splits are often considered positive signals, which increase the interest of investors. As a larger number of people start trading the stock, its liquidity improves. Sometimes, this leads to price movements in the short term.
Conclusion
While corporate actions are important, investors must not consider them to be the main reason for investing in a stock. The fundamentals of the company, its growth prospects, and financial health determine its long-term performance.
Also, it’s easy to assume that receiving more shares means you have made a profit. However, that’s not always the case. For instance, you don’t gain immediate wealth when shares split.
Investors, therefore, must value the fundamentals while tracking share prices. With the right understanding, you can stay confident in your approach to investment to benefit from growth in the long term.