Types of Corporate Actions Every Investor Should Know
The stock value is influenced not only by economic, political, or geopolitical events but corporate as well. What are corporate events and which of them investors might find interesting?
We should note that some actions from the list below can have a rather insignificant influence on the stock value, while the others, on the other hand, may force it to plummet or skyrocket.
Major corporate actions may be considered the following:
- Financial statement release
- Meetings of the board of directors
- Ex-dividend date
- Dividend distribution
- Stock split
- Reverse split
- Additional issue
- Mergers and Acquisitions
Now let’s dig deeper into each of these actions.
Financial statement release
Companies publish their financial statements over the previous reporting period. Statements are usually published in the morning before the trading session starts or in the evening after it is over. This is done to avoid significant surges in prices.
After financial statements are released, investors and traders have enough time to prepare for trading and make decisions on their further activities. As a rule, trading sessions after financial statement releases are opened with a price gap. Periods for reports are the following:
- Quarterly statements
- Half year statements
- Annual statements
Financial statements published by companies influence their stocks in direct proportion to the profit they received. If the numbers are good, the share price starts rising and vice versa. In theory. In the real world though, it might happen in the opposite wave, and the reason is that companies try to overstate or understate their financial performance. They do it for different purposes and one of them is to attract investors.
Meetings of the board of directors
Just like financial statements, meetings of the board of directors also have a significant influence on stocks. During the meeting, a lot of important decisions are made, such as Ex-dividend date, dividend distribution, mergers and acquisitions, stock splits. Boards of directors discuss companies’ current state and their future.
The date and agenda are usually reported at least 3 days before the meeting, while the results are published after 3 days it was finished.
The ex-dividend date is the last date, on which an investor has to own shares to receive dividends (closure of shareholders register). After the ex-dividend date, the final list of shareholders is formed, who will take part in the dividend distribution.
Speculative traders sometimes resort to cunning and buy shares several days before the ex-dividend date so that they could receive dividends because the length of share ownership doesn’t matter and has no influence on dividend distribution. As a rule, dividends are distributed within a month after the ex-dividend date.
On this day, traders or investors receive dividends payable to their accounts. The sum depends on the decision made during the meeting of boards of directors and is calculated based on the company’s financial performance. Dividends can be paid not only when the company performed well but also when its financial statement is negative.
The stock split divides the value of each of the outstanding shares of a company. In this case, the capitalization remains the same but the number of shares increases. This procedure is performed to decrease the cost of one share. The cheaper the shares, the more retail investors can buy them. As a result, shares become more liquid on the stock exchange and more attractive to traders and investors. An upcoming split means that the company is doing well and its financial performance is positive.
The stock split procedure is as follows:
- Recommendations on the stock split is tabled for discussion during the meeting of the board of directors.
- Decision on the stock split is approved on the general meeting by voting and approved by majority of votes.
- Board of directors makes a decision on issuing additional shares.
- All necessary documents are registered.
- A required number of shares is issued.
- The company introduces changes to its certificate of incorporation relating to the number and cost of shares.
The stock split does not influence the profit made by traders or investors, that’s why no specific trading strategies for such actions have been created. Nevertheless, some traders buy shares after the stock split hoping for quick growth.
Decisions on the upcoming stock split can be found on companies’ websites or publicly available sources on the Internet. If you are already a shareholder, you will be notified by your company.
A reverse split is a merging of several shares into one. This doesn’t often happen on the stock market and indicates that the company isn’t doing great.
Another scenario of a reverse split is mergers, acquisitions, or pooling. As a rule, a reverse split makes companies lose the trust of their investors.
The additional issue of shares is issuing new shares in addition to already existing ones. In this case, shareholders’ shares are diluted.
The key objective of the additional issues is to attract extra funds for the company's development or paying existing debts.
Key results of additional issue:
- Attraction of new investors by increasing the number of floating shares.
- Changes in the company’s own capital.
- Changes in the profit per share to the downside.
- Changes in shareholders’ influence on the company management. If an investor owns 51% if the initial quantity of shares, additional issue may reduce this number and deprived them of the advantages.
Additional issue indicates that the company experiences financial problems. However, there are exceptions: the company may issue an additional block of shares to boost its development or implement new projects.
A merger occurs when two or more companies combine into one with all parties involved agreeing to the terms. Usually, one company surrenders its stock to the other. After that, there is a new corporation, which is a legal successor of merged companies.
The key purpose:
- Better competitive environment.
- Improvement in the output quality.
- Diversification of production and risks.
- Increase in creditability.
- Growth in the company’s value and its shares.
- Innovations and expansion of the range of the company’s products.
After the merging procedure, a new corporation appears on the market, which is a legal successor of merged companies. As a result, the market may get a new product/service of high quality or cutting0edge technologies.
It’s quite difficult to keep track of all corporate actions when looking for a company to invest in but one can choose the most important of them and focus on them. It often happens that the price of shares may rise or fall before the ex-dividend date or dividend distribution. Investors can monitor the payment schedules of different companies and make an investment decisions based on them.
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