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8 important types of corporate actions, how they affect stock market

What are corporate actions?

Corporate action, from the name it is very clear that it may be something related to management point of view, corporate actions are the various efforts and changes made by the promoter and the board of the director to get the best out of their companies.

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It helps to understand the company in a good way as like there are types of corporate actions that may be taken by the company: stock split, bonus shares, dividends and many more, if their execution is perfect then it helps us to understand the financials of the company in the better way.

While moving ahead it is very important to understand that: ‘TO WHOM IT MAY CONCERN’- this section will tells about how the corporate actions going to affect the market.

It is clearly related to the company’s shareholders, bondholders, investors, and traders who trade in the stock market, like you can say that it is related to stock market only.

Corporate actions

The activity of a listed company on stock exchanges which directly or indirectly which may go to make an impact on the company’s growth decided by the management and the board of directors.

Corporate actions effect a class of investors in the stock market like:

  • ·     Preferred shareholders
  • ·     Retail investors
  • ·     Bondholders

It may affect the company directly or indirectly, and the corporate action may have the different types as well-

  • 1.   Company name change
  • 2.    IPO
  • 3.    Stock split
  • 4.    Reverse stock split
  • 5.    Share’s buyback
  • 6.    Dividends
  • 7.    Rights issues
  • 8.    Merger and acquisition

From the basic understanding of stock market, you may classify these action as mandatory, non-mandatory actions for the shareholders of the company.

Mandatory actions are the actions taken by the management of the company in which the involvement of the investor and the shareholders are mandatory otherwise he is going to lose his/her position in the market. Like we have stock split and bonus shares.

Non-Mandatory are the actions just opposite to the mandatory actions in which the involvement of the investor depends on the investor’s interest in the company. For we have shares buy back.

Coming on the first action which is company name change.

Company name change

Easy to understand that what is going to happen in this action, company is going to change the name of its organisation, it may affect the certain investors which is not as active as the other traders. Unknowing of what may lead to suspicious random action taken by the shareholders, so whenever company execute this action, the proper ads were published in the newspaper and on the social media, news channels as well.

Initial public offerings

Initial public offering is the way through which the general retail investors can also became the part owner of the company.

Initial public offering can only be done single time with a company, as it is the first-time company is offering its partnerships in terms of shares of the company to gain the capital from the stock market in which the public invest.

It makes sense to the investors who want to choose a multi-bagger stock from the market, in case of those investor it is mandatory to evaluate the financials of the company coming up with the IPO.

Stock-split is one of the finest signs to the bullish pattern in the company as it will going to improve the liquidity and shares in the company.

Stock-split

Without knowing the meaning of stock-split will certainly cause you a doubt about this that if it is something related to bad news in the company.

Stock-split is the action which increases the shares in your portfolio by the keeping the market capitalization of the company constant.

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What happen in the stock-split is that the number of shares in the portfolio increases, while the total invested value remains same in the account.

Like a company had declared the dividend of 2:1 it means that for every 1 share held in the demat account company will going to give 2 new shares to every investor satisfying the condition.

It shows very strong bullish pattern of the share price of the company.

Reverse stock-split

Just opposite of the stock split when company tries to increase the share price of the company to make sense with the fundamentals, this is the case when stock price is trading below its original value, or to give boost to the face valueof the company.

Dividend

Dividend is just like the interest earned in the bank accounts fixed deposit, the only difference is that there is guaranteed pre-defined value of the interest and here in the stock market the company is not entitled to give the dividend on the mandatory basis, also have no fixed pre-defined amount is set.

Whether to give the dividend to the investor or not is decided in the AGM (annual general meeting) of the company.

For the comparative view in the market, you will be going to find that it is not compulsory for the company to give the dividend every year, but most companies do.

The dividend which is declared in between the year is known as the interim dividend, and the dividend declared in a year is known as the annual dividend.

It is all on the company either they give the dividend or not, if they find that they can generate more returns than any other investment returns available in the market then they do not share dividend with the shareholders.

But most of the time they try to issue the dividend to gain the customers and shareholders satisfaction and trust for the company.

It is also expressed in terms of face value of the company like a FV of the company is 10 and they issue dividend 100 rupees then it is 1000% of FV.

Rights issue

Rights issue is just like the second IPO like if the company offers new shares to the existing shareholders in the market. Think it as the way to raise the capital for a company previously listed on the stock exchanges.

For instance, company declare 1:2 rights issue it means for every 2 shares hold shareholders will be entitled to 1 extra shares.

And yes, obviously the price at which the new shares are going to issued will be lower than the market price of the share.

Almost all big players in the market follow this, as of the last year data Reliance issued new rights of 53 thousand crores rupees.

Buyback of shares

Often share buyback occur at the price lesser than the market price of the share and it is taken as the big positive from the fundamentals point of view.

From the name it is very clear that it deals with the extra shares floating in the market, it is just opposite to the term promoters losing stack.

In stock buyback company purchase its shares from its shareholders at lower premium. There may be some results and consequences of the share buyback which is listed below:

·      Share price may increase as people participate heavily in buying the shares of company to gain the premium difference between the market price and price offered.

·      Company’s management is concerned about good promoter background and fine board of directors.

·      Promoters do not lead anyone to overcome the company as they are believing in their own company.

·      It may increase the financials of the company like earning per share (EPS).

Mergers and Acquisition

Merger occurs when two company combine or merge to form a big single unit and their merger occurs in such a way that their fields of interest is same, and their goals and short-term target are of the same count.

Whereas Acquisition is when one company take over to other company and purchase its more than 50% stake. It gives the company an advantage to the parent company that it may takeover its name and assets. And moreover, it depends upon the type of contract both signs.

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