Public companies sometimes issue corporate action, which is almost always something that affect the stock price.
Investing in companies means that you need to understand how their corporate actions will impact the stock. Such actions also a lot about the company’s financial health.
A stock split is also sometimes called a bonus share, and this divides the value of each of the outstanding shares of a company.
Two-for-one stock splits are the most common type. It means that an investor holding a stock of a company will automatically own two shares, each worth half the price of the original share.
When the company cut its own stock price in half, the market will adjust the price on the day of the split. Current shareholders will be rewarded and potential buyers will buy into the stock for a cheaper price.
A stock split is still a non-event in that it does not impact a company’s equity or market capitalization. It only affects the number of shares outstanding.
Meanwhile, a company may implement a reverse split if it wants to shore up the price of its shares.
For instance, if a shareholder holds shares for $1 each share, and the number of shares is 20, the reverse split will turn 20 shares into one share that costs $20.
This can be a sign that the company has plummeted so low that its leaders want to boost up the price to at least make the stock appear stronger. In some cases, companies are fighting to avoid getting branded as a penny stock.
Other times, reverse splits are implemented to drive out small investors.
A company can issue dividends in the form of cash or stock. Usually, they are paid out at regular intervals, often quarterly or annually.
Dividends are shares of the company’s profits that it gives back to the owners of the stock as an incentive.
Dividend payments affect the company’s stock in that the distributable equity, retained earnings, and paid-in capital are reduced.
A cash dividend is when each shareholder is paid a certain amount of money for each share. If an investor owns 100 shares and the cash dividend is $1 per share, the investor will receive $100.
Meanwhile, stock dividend comes from distributable equity but in the form of stock and not cash. A stock of dividend of 10%, for instance, means that the investor will receive one additional share for every 10 shares owned.
Mergers and Acquisitions
A merger takes place when two or more companies join forces with all parties agreeing to the terms. Most of the time, one company surrenders its stock to the others.
When a company implements a merger, the investors usually treat it as an expansion. But they could also think that the industry is shrinking so the company needs to join force with competition to keep growing.
An acquisition, meanwhile, takes place when a company buys a major stake of a target company’s shares. The shares of the two companies are neither swapped nor merged. An acquisition can either be friendly or hostile.
Learn the basics of financial products and Labrich Trading Strategies by studying the historic events that have shaped our world giving you a better understanding of trading and what drives volatility.