Investing 101: A Corporate Action

A corporate action is something that a company will do from time to time that is going to have an impact on the company's stock. There are several different types of corporate actions that you will need to be aware of. Here are the basics of corporate actions and how they work.

Corporate Action

When a company decides to utilize a corporate action, they are going to need to run it through the Board of Directors of the company. In order to start the corporate action, the Board of Directors has to vote on it and pass it through. At that point, the corporate action will take place.

Stock Splits

One of the most common types of corporate actions is a stock split. With a stock split, they are going to divide the active shares in the market place by a certain amount. This is going to increase the number of shares that are in the market place. For example, one of the most common types of stock splits is a 2-for-1 split. This means that if you own one share of this particular company, you are going to get an additional share. By doing this, the price of the stock is going to be cut in half. This type of corporate action does not necessarily affect the price of the stock. The company will usually do this to increase the number of shares in the market place and also increase liquidity. This makes an individual share of the company more affordable for smaller investors.

A company can also utilize a reverse split. This is when they take two shares of stock and turn them into one. This is done to increase the price of the stock in the market place.

Dividends

Another type of corporate action is when they issue a dividend. Periodically, many companies will issue dividends to their shareholders. This is an action that affects the equity in the company because they are distributing part of the profits. When this happens, the share price of the company will usually be decreased in the market by the amount of the dividend. Companies can issue dividends in cash or in additional stock in the company.

Rights Issues

This is a corporate action that allows existing shareholders to purchase more shares of stock in the company. It only affects existing shareholders and not anyone else in the market place.

Mergers and Acquisitions

Another popular type of corporate action involves mergers and acquisitions. Many times, companies will want to merge with a company of equal size in order to increase their reach in the market place. Other times, they will want to purchase a smaller company to take advantage of something that they have. Both of these actions tend to increase the price of stock in the market.

Spin Off

A spin off is when a company decides to start a smaller company with assets from the existing company. This might be done to take advantage of another opportunity in the market or to branch out into other areas.

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