Stay ahead of the curve: Understanding corporate actions and their implications
What exactly are corporate actions? In simple terms, these are actions that are initiated by publicly traded companies. These actions could range from everyday operations to significant strategic decisions. Corporate actions need the approval of the company’s board of directors. Some corporate actions also need authorisation by shareholders through voting.
Why does knowing about corporate actions matter?
By staying informed about upcoming corporate actions and their potential implications, as investors, you can make more informed decisions about the companies they have invested in. Insights about corporate actions help you to assess how these might affect the stock value and dividend payments among other things. An understanding of corporate actions helps you to tweak your investment strategies accordingly.
How to keep a tab on corporate actions?
You can find information about corporate actions of a company on their websites. Typically, companies announce corporate actions through press releases and regulatory filings. Stock exchanges such as BSE and NSE may also provide information about corporate actions on their websites. Annual reports also mention the details of past and upcoming corporate actions.
- Dividends: When companies make profits, they share a percentage of the same with shareholders. These profit-sharing payments are called dividends. The percentage of the dividend is determined by the company's board of directors.
- Bonus Issue: When a company offers additional free extra shares to its existing shareholders, it’s called a bonus issue. Instead of increasing the dividend payments, companies opt to distribute additional shares to their shareholders. This not only rewards the existing shareholders but also encourages more investment.
- Stock split: A stock split is when a company decides to increase the number of shares available by lowering the price of each share. For example, if you had one share worth ₹1,000. After the split, you might have two shares worth ₹500 each. Even though you now have two shares, the value of your holdings remains the same. The splitting makes the shares more affordable for investors and this may create an opportunity for more investors to buy shares in the company.
- Rights issue: A rights issue is when existing shareholders are offered the opportunity to buy additional new shares. However, unlike bonus issues, these additional shares are not available free of cost. Companies issue a rights offering as a means to raise additional capital.
- Buyback of shares: As the name suggests, a buyback of shares is when a company decides to buy its own shares from existing shareholders. The company can buy the shares back either by issuing a tender offer. Usually, the company buys shares when their price is higher than the current market price.