Individuals who wish to be successful investors or traders must have a good grasp of market basics. Show Understanding the various forms of business activities is an important fundamental part of investing. Corporate ActionsA corporate action is a decision made by the Board of Directors with the permission of the company's shareholders. Corporate actions comprise a pivotal point at which the firm and its stock values undergo significant changes. This might range from something as small as altering the company's name to something as important as declaring dividends. Corporate acts may be divided into two categories from a financial standpoint: monetary and non-monetary. To put it another way, certain business acts have a monetary impact on the firm and its shareholders, while others do not. Changing the company's name, for example, is a non-monetary corporate move. Dividend declaration, on the other hand, is a monetary business move that will have an impact on stock prices. (Read also: Stock market analysis) Different types of Corporate actionsDividends are paid to the company's shareholders. Dividends are given to disperse a company's earnings throughout the year. Dividends are distributed per share. As the example provided by Zerodha, Majesco, for example, announced an interim dividend of Rs 974 per share. The stock was trading at Rs 980+ a share when the dividend was issued, which was in the last few days of December 2020. After subtracting the dividend amount, the price of one share will fall. The price of a share plummeted from Rs 985.65 per share on December 21 to Rs 12.2 per share on December 22, 2020. Dividends are not required to be paid every year. If the corporation believes that instead of paying dividends to shareholders, it would be preferable to use the same funds to fund a new initiative that would benefit the company in the long run, they are free to do so. Furthermore, dividends do not have to be paid only from earnings. If a corporation makes a loss throughout the year but has a significant cash reserve, it can still pay dividends from those funds. Dividend distribution may be the greatest option for the organisation at times. When the firm's development possibilities have been exhausted and it has spare cash, it makes sense for the corporation to reward its shareholders, therefore returning their faith in the organisation. The decision to pay a dividend is made at the company's Annual General Meeting (AGM), which is attended by all of the company's directors. Dividends are not paid immediately upon the announcement. This is due to the fact that the shares are exchanged throughout the year, making it impossible to determine who receives the dividend and who does not. The timetable below can assist you in comprehending the dividend cycle.
The Dividend Cycle, Source: www.zerodha.com
When a stock becomes ex-dividend, it normally decreases to the same extent as the dividends paid. If ITC (now trading at Rs. 335) declares a Rs.5 dividend, for example. The stock price will decline to the extent of the dividend paid on ex-date, and in this situation, ITC's price will drop to Rs.330. The sum paid out no longer belongs to the corporation, which is why the price has dropped. Dividends can be paid at any point during the year. It's known as the interim dividend if it's paid within the fiscal year. The term "final dividend" refers to a payout paid at the end of the fiscal year. Bonus shares are additional shares issued by the corporation to its owners. A 1:1 bonus issue, for example, indicates that for every share you own, you will receive an extra share in the firm. So, after the bonus issue, what happens to the stock price? As the value each share is modified proportionally, the total share value does not drop or rise. If you own 50 Rs 10 shares, a 1:1 bonus issue will turn your holdings into 100 Rs 5 shares. Although the overall share value of Rs 500 remains unchanged, the value per share decreases, making it simpler for small investors to invest. Astral Poly Technik is a firm that manufactures plastic pipes. It had announced a 1:3 bonus issue with a record date of March 19, 2021. According to this, for every three existing equity shares of Re 1 each, one equity share of Re 1 will be issued. (Related reading: An Overview of Corporate Governance)
Types of corporate actions The term stock split may seem strange at first, yet it occurs often in the markets. It's self-evident what this means: the stocks you own have been divided! The number of shares owned rises when the firm declares a stock split, but the investment value/market capitalization stays comparable to the bonus issue. The stock is divided into two halves based on its face value. If the stock's face value is Rs.10 and it undergoes a 1:2 stock split, the face value will be Rs.5. If you had one share before the split, you would now have two shares following the split. Eicher Motors is an example of a recent stock split in India. The firm, which until August 2020 was one of India's most expensive equities in terms of per-share valuation, announced a 1:10 stock split on August 24, 2020. After the stock split, the company's shares began trading at Rs 2,300 per share, down from Rs 21,700 per share before the stock split. A rights issue occurs when a firm issues new shares to its current shareholders rather than the general public. Unlike bonus shares, the Rights issue has a cost – generally a discount – attached to it. A 1:5 Rights issue, for example, allows you to subscribe for one extra share for every five shares you already own. It's worth noting that a company may issue Rights issues to fund its expansion or to pay down debt. A word of warning, however: the investor should not be misled by the company's discount, but rather look beyond it. A rights issue differs from a bonus issue in that it requires payment in order to get shares. As a result, a shareholder should only subscribe if he or she is confident in the company's future. It is plainly cheaper to acquire it on the open market if the market price is lower than the subscription price/right issue price. (Recommended reading: Benefits of stock market) It occurs when a firm buys its own stock from its owners, generally at a higher price than the market price. Buybacks are used by companies to consolidate their holding in the company and gain more control, to prevent the share price from falling, to increase earnings per share (by reducing the number of outstanding shares in the market), or to increase investor confidence in the promoters. Before you join in a stock buyback programme, find out why a firm is doing it. Short-term capital gains are taxed at 15%, while long-term capital gains are tax-free. Buybacks through a stock exchange have the same tax treatment as regular sales: short-term capital gains are taxed at 15%, while long-term capital gains are tax-free as explained by the Economic Times. In the end, It is critical to comprehend the consequences of business actions in order to assess a company's worth. A rights issue may cause a drop in the share price, but a share repurchase may cause a rapid increase in the share price. As a result, analysts and stock specialists scrutinise these company acts attentively in order to forecast stock prices and future performance.
The stock value is influenced not only by economic, political, or geopolitical events but also by corporate actions. What are corporate events, and which of these might investors find interesting? We should note that some actions from the list below can have an insignificant influence on the value of a stock, while others may force it to plummet or skyrocket. The following are considered major corporate actions:
We will now analyse each of these actions. Financial statement releaseCompanies publish their financial statements over the previous reporting period. Statements are usually published in the morning before the start of the trading session or in the evening after it is closed. 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. The reporting periods are the following:
Financial statements published by companies influence their stocks in direct proportion to the profit they have received. In theory, good numbers take stock prices higher and vice versa. However, in the real world, it might happen in the opposite way, and the reason is that companies try to overstate or understate their financial performance. They do this for different purposes, one of them being to attract investors. Meetings of the board of directorsJust like financial statements, board meetings during which the board of directors discusses the company's current state and future also have a significant influence on stocks. Several important decisions are made during the meeting, such as setting the Ex-dividend date, deciding on the dividend distribution, possible mergers and acquisitions, and stock splits. The date and agenda are usually announced at least three days before the meeting, while the results are published three days after. Ex-dividend dateThe 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 is formed of the shareholders who will take part in the dividend distribution. Speculative traders are sometimes cunning, buying shares several days before the ex-dividend date for the purpose of receiving dividends since the duration of the share ownership does not matter and has no influence on the dividend distribution. As a rule, dividends are distributed within a month after the ex-dividend date. Dividend distributionOn this day, traders or investors receive dividends paid into their accounts. The sum depends on the decision made during the board of directors meeting 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. Stock splitThe stock split divides the value of each of the outstanding shares of a company. In this case, the capitalisation 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:
The stock split does not influence the profit made by traders or investors, and this is why no specific trading strategies are created for such actions. Nevertheless, some traders buy shares after the stock split hoping for quick growth. The 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. Reverse splitA reverse split is a merging of several shares into one. This rarely happens on the stock market and indicates that the company isn't doing well. Another scenario of a reverse split is mergers, acquisitions, or pooling. As a rule, a reverse split makes companies lose their investors' trust. Additional issueThe additional issue of shares entails 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 additional funds for the company's development or to pay existing debts. Key results of additional issue:
Additional issue indicates that the company is facing financial problems. However, there are exceptions: the company may issue an additional block of shares to boost its development or implement new projects. MergersA 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. Thereafter, a new corporation is formed that's a legal successor of the merged companies. The key purpose:
After the merging procedure, a new corporation appears on the market, which is a legal successor of the merged companies. As a result, the market may get a new product/service of high quality or cutting-edge technologies. Closing thoughtsIt'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 ones to focus on. 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 investment decisions based on these. Key: Tags: investing tips, stock split, corporate actions, dividend distribution, merger and acquisition |