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What are Corporate Actions: Meaning, Types & Examples

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Synopsis:

This blog explains corporate actions, i.e. the events that impact a company's stock and influence your investment decisions. Knowing these actions can help you make informed choices, potentially maximise returns, and minimise risks.

Article Highlights:

  • Understand how corporate actions affect your holdings and adjust your investment strategy accordingly.

  • Certain actions, like stock splits or cash dividends, can present opportunities to boost your investment returns.

  • Be aware of potential dilution from stock splits or the implications of mergers and acquisitions to mitigate investment risks.

What are Corporate Actions? 

Essentially, corporate actions are activities started by a public company that directly affect its shares or other issued financial assets like corporate bonds. Stock corporate actions can have important consequences for your investments, so it is very important to stay updated and informed about them as an active trader in the stock market.

Corporate Actions - An Overview

Corporate actions are choices made by a company that can greatly impact its stock market performance, how it is financed, or the rights of people who own its issued shares and bonds. There are two types of corporate options. They can be either voluntary, which means they need approval from shareholders, or mandatory, meaning they are decided by the company's board of directors without needing shareholder approval.

Think of a company like it is a house. Stock corporate actions are similar to making renovations or adding new rooms in the house. They can alter the layout, worth, and ownership of the property, affecting all who have an interest in it.

Why Corporate Actions Matter

Corporate actions can have a significant influence on your investment decisions. Understanding the different types of actions and their potential consequences can allow you to have the following advantages while trading in the stock market.

Make informed choices

Knowing how a corporate action might impact your holdings allows you to adjust your investment strategy accordingly.

Maximise your returns

Certain types of corporate actions can present opportunities to increase your returns, such as stock splits or cash dividends.

Minimise risks

Being aware of potential dilution from stock splits or the implications of mergers and acquisitions can help you mitigate risks associated with your investments in the stock market.

Types of Corporate Actions

There's a wide range of corporate actions, each with its own set of implications. Here's a breakdown of some of the most common ones:

Stock Dividends

Companies may distribute a portion of their profits to shareholders in the form of additional shares. This increases the number of shares outstanding but doesn't necessarily change the overall value of the company. Such a stock corporate action can be a good sign, indicating a healthy and profitable company.

Cash Dividends

This is a more traditional way for companies to distribute profits to shareholders. Investors receive a cash payment per share they hold. Cash dividends are a direct way for investors to benefit from the company's success, and a healthy type of corporate action.

Stock Splits

A company may decide to split its shares into a larger number of shares with a lower price for each share. This does not change the company's total value, but it can increase the stock's liquidity and potentially attract new investors. This type of corporate action is typically seen as a positive sign, indicating a confident company with a growing share price.

Reverse Stock Splits

The opposite of a stock split, a reverse stock split involves consolidating a company's existing shares into a smaller number of shares with a higher price per share. This is typically done to meet exchange listing requirements or improve the stock's perceived value in the stock market. Reverse stock splits can be viewed with caution, as they might indicate financial difficulties.

Stock Options

Companies may grant employees or other parties the right to buy shares at a predetermined price by a certain date. Stock options incentivise employees and can dilute ownership for existing shareholders. 

Disclaimer:Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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