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Aditya Goela, CFA

Aditya Goela, CFA

Co-Founder and Trainer at Goela School of Finance LLP | Chartered Financial Analyst® | Proprietary Trader | JoshTalk Speaker
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What Are Corporate Actions?

Aditya Goela, CFA

Aditya Goela, CFA

Co-Founder and Trainer at Goela School of Finance LLP | Chartered Financial Analyst® | Proprietary Trader | JoshTalk Speaker
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Twitter
LinkedIn

In layman language, corporate actions mean an action taken by a company or a corporate entity that lays a direct impact on a company’s share price. The Board of directors of the company initiates these actions which are approved by its shareholders. The majority of retail simply buys stocks on the announcement of a corporate action, which is wrong. Let’s dig deep into the realm of corporate actions as you would learn in a stock market institute in Noida.

What Is The Purpose Of A Corporate Action?

Corporate Actions in stock market

●       Corporate Restructuring

The companies listed on the stock exchange are multi-million dollar enterprises that need corporate restructuring. They took this action to make their business more profitable and operations more efficient through various initiatives like mergers & acquisitions.

●       Affordable share price

Shares of many companies with the best fundamentals eventually start trading at very high prices. It becomes difficult for investors, preferably retail, to invest in the stock. To increase participation by making it more affordable to retail, companies announce stock splits, bonuses, etc. A recent example of the Split was in Eicher Motors, which made the share more affordable.

●       Sharing profits with shareholders

Companies reward their shareholders by distributing a percentage of their surplus profits, which is called dividends. Through this way, companies boost investor confidence in the company. 

Types of Corporate Actions

  • Bonus Issue

Let’s understand bonuses through an example:

If someone had bought 1,000 shares of Infosys in 2003, and not invested thereafter, his current shareholding is 16,000 shares of Infosys. Surprised? The number of shares increased because of the bonus shares issued by the company in the past 20 years. 

A bonus issue is a share given as a reward to existing shareholders to distribute gathered reserves instead of giving dividends. This also makes the share price affordable for small investors. There is no change in the face value of the share. 

The company allots bonus shares in a fixed ratio. If the holder doesn’t have the required eligibility for the bonus, then the company may provide them with some amount in their bank account. If a company announces a bonus of 1:1 then, it means that shareholders will get 1 bonus for every 1 share it holds. When bonus shares get issued to shareholders, the holding quantity increases, but the investment amount remains the same. 

Let’s understand through an example- If a shareholder has 100 shares of CMP Rs 100 and the company announces a 1:1 bonus issue for that share, the company will issue additional 100 shares to him. However, the price of each share will reduce to Rs 50/per share in his holdings. It is a beneficial step, as good companies reward their minority shareholders with bonus issues regularly. We deeply discuss such traits of fundamentally strong companies in our stock market courses for beginners.

  • Stock Split

One of the most intriguing ways of reward distribution from companies is- splits. Yes, you heard it right! 

A stock split doesn’t mean that the stock will get divided, rather the number of held shares gets split! It is like a bonus where the number of shares increases, but the investment amount remains the same. In the split, the company reduces the face value of the stock in the same announced ratio. 

Let’s suppose a stock has a face value of Rs 10 with an announcement of a 1:5 split. This means the face value of the stock will reduce to Rs 2. This also means that the shareholder will get 5 additional shares for every 1 share they own. The companies do stock splits to encourage retail participation, just like they do in bonuses.

  • Right Issues

When a company needs additional capital for its operations, sometimes it approaches its existing shareholders for extra funds via the rights issue. The shareholders have a choice and not an obligation to subscribe to the right issue. The company allots the shares in a proportion of their shareholding. Let’s take an example:

If the company announces a 1:2 Rights Issue, it means for every 2 held shares, the shareholders can apply for 1 additional share. 

The company offers the shares at a discounted price from the market value to attract more investors. However, an investor should not fall prey to a company’s discount. Before applying for the rights issue, an investor should always analyze the financial statements of the company first while keeping the future growth prospects in mind. In short, you should first do a complete fundamental and management analysis of the company, before subscribing to its right issue. People can learn both the assessment processes from stock market courses online.

  • Dividends

To be put in simple words, dividends are compensation to shareholders for their trust and investment in the company. The companies pay dividends from the surplus profits they earn from their business on a per-share basis.

A company is never obligated to pay dividends to its shareholders. For instance, Infosys paid a dividend of Rs 12/per share to its shareholders in FY 2020-21. For declaring dividends, the company considers the face value per share. Infosys has a face value of Rs 5 and therefore, the dividend percentage would be 12/5 x 100= 240%. 

Dividends have the potential to become a significant source of consistent passive income. Hence, investors should add the parameter of historical dividends in their fundamental analysis strategy apart from growth parameters.

  • Buybacks

When promoters of a company want to invest in their own company, they issue a buyback. This directly affects by reducing the liquidity of shares. This is because, with buyback, the number of outstanding shares available to trade in the markets gets reduced. Sometimes companies issue buyback at a premium to the markets, which is perceived as a very lucrative short-term profiting trade for both traders and investors.

Buyback augments the investor confidence in the company as promoters are showing confidence in future growth through this move. The investors do not have any obligation to subscribe to a buyback, as it’s completely their choice.

Where to find the corporate actions data?

The latest data for upcoming corporate actions of all the listed companies are available on NSE and BSE’s website, apart from the following links:

Conclusion

The corporate actions of a company project a lot about its financial position to the investors. Therefore, it is crucial to learn stock market fundamental analysis to understand these actions in-depth, so that you can make an informed decision and not just buy a stock just because an action is coming.

If you want to learn how to pick stocks that can generate wealth for you and your goals, then here comes the good news! We at the Goela School of finance have trained thousands of students through our stock market courses for beginners, and we can help you out in your journey too through our ISMA program!

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