Thread: Corporate Actions by Companies
Corporate action is an activity that brings some material change to a company and impacts it's stakeholders. Let us see what are these corporate actions.
Corporate action is an activity that brings some material change to a company and impacts it's stakeholders. Let us see what are these corporate actions.
1) Dividends: When company makes profits, It shares a piece of it with shareholders in form of cash distribution. This piece is called Dividend. It is one way to return the money back to investors. This benefits the shareholder as their cost of holding the investment goes down.
2) Buybacks: When company has huge surplus of cash on it's books, It may decide to return some portion of cash to shareholders by simply repurchasing the stock from them at some premium to market price. This is another way of returning money to shareholders.
3) Stock Split: This involves increasing the number of shares by simply dividing the existing shares in to parts. Eg: Converting 1 share of Rs. 10 each into 5 shares of Rs. 2 each. This does not have any impact on shareholders wealth but creates more shares on market for trading.
4) Bonus Issue: Company can reward it's shareholders with its free reserves instead of using its cash (in case of Dividends & Buybacks). Company simply converts its free reserves that are accumulated from past profits into share capital.
Eg: Bonus of 1:1 means the shareholder gets 1 bonus share for every share already held by him. There is no cash outflow in this exercise.
5) Rights Issue: When a company needs additional capital, It can raise the same by issuing more shares.
5) Rights Issue: When a company needs additional capital, It can raise the same by issuing more shares.
However, These shares are first offered to existing shareholders at a discounted price as a gesture of loyalty with the company. This provides them opportunity to increase their stake at lower than market price.
by @RJGyanchandani
by @RJGyanchandani
