Corporate Action – What does it mean to a Common Trader?
Corporate actions are events or circumstances concerning the company agreed upon by the board of directors. Most people do not know what exactly corporate actions are. For common traders, a corporate action can be seen as the decision of a company that seeks to create a good effect on the business. For you to have a deeper understanding of corporate actions, let’s take a closer look of some of the examples below.
As one of the many corporate actions, a bonus is the additional shares offered by the company to its existing share holders. At times, it is considered as reward or gift for loyal share holders. Usually, it is given to retain the cash into the system and it can be reinvested to the capital expenditure.
In businesses, there are 2 kinds of dividends that can be issued namely stock and cash dividends. The stock dividend is otherwise called as Bonus. Either of the two can be issued for a particular time or season. The retained earnings or company equity is reduced once a dividend is issued. It is because the total equity of the company is also affected by percent.
Rights issues are only given to existing shareholders providing additional or added shares to them. When you are a company’s existing shareholder, you are given the right to buy or claim shares even before they are given to the public for auction. Rights can be in any form such as stock split and much more.
A stock split is also known in some terms as a bonus share. From the name itself, split means to divide every share in the company thus, the price per share is reduced to an amount. When this happens, the market itself will have to adjust its price of the share. The good thing about stock split is that it does no harm on the market capitalization of the company.
Also termed as repurchase, buy back is the re-buying of any existing share that lessens the quantity of its shares especially when it reaches the open market. Some companies would invest to repurchasing of shares to improve the value for company shares and many more reasons.
In some cases, shareholders are given the option to convert their preferential share or Debentures into equities. It means that they can opt to convert their holdings to a new share or stock if they want. Yet, future market situations must be considered before deciding to convert your stocks.
Employee Stock Ownership Plan (ESOP) is a benefit given to employees wherein the sponsoring employer will invest in a stock as a contribution for the worker. An ESOP can only be qualified once the sponsoring company, as well as the participants, agreed to price. It generally motivates the employee to outperform their job
Follow on Public Offer (FPO) is issued by a public company to investors or shareholders. Commonly, it is a stock issued that has been listed on public exchange already. This helps in determining the identity of the sellers.
Corporate actions are meant to adjust the company books and its capital structure. They do well in catering the best results in the business from long term perspective.