How does corporate action affect on company's stock price?

If you want to become successful stock market investor, you should have known the fundamental analysis of the stock or say company. Corporate actions don't affect on stock price immediately. 

These 5 corporate actions help to identify for right stock and gives a overview of the company. Even corporate actions helps determine whether when to buy or sell a particular stock.

What is Corporate Actions?

Corporate actions are taken by the board of directors a company which has an impact not only on the share price of the company but also on shareholders. Understanding corporate actions are important for shareholders to understand its impact on their wealth. A basic knowledge about corporate actions can help investors to take investment decision wisely.

Impact of Corporate Actions on stock price

So, let's understand the top 5 corporate actions and its impact one by one - 

(i) Dividend

A company belongs to its shareholders, therefore all the profit made by the company belongs to them. These profit can be reinvest in the building or can also be distributed to the shareholders in the form of 'dividend'.

 Distribution and profit ratio will depend on the opportunity to achieve profit. The dividend can be defined as a reward paid to the shareholders out of the company's profit or out of the cash reserves held by the company. 

The dividend can be declared during any time of year. The dividend declared during the year is called 'Interim dividend and the dividend declared end of the financial year is call 'Final' dividend. A company has to pay dividend within 30 days its declaration.

Sometimes a company doesn't distributed dividend because to reinvest profit in new products, to expand existing business and a company doesn't made enough profit during this year.

Impact of dividend declaration on stock price

Before paying the dividend to the shareholders, the company has to announced declaration the dividend amount and the ex-dividend date first. When the market gets know about dividend announcement, the share price usually goes up for short term and investors are ready to buy at premium value for the dividend yield. Similarly the ex-dividend date, when the buyer of the stock will no longer be entitled to receive dividend amount, the price get corrected which is equal to the dividend amount.

For example, if a company share price is Rs 200 and the declared the dividend amount of Rs 5 per share, after paying the dividend the market price of stock falls to ~ Rs 195.

(ii) Bonus Issue

Bonus share, also known as 'equity dividend' is an alternative of cash dividend. Bonus shares are additional shares issued to the existing shareholders by the company without any charge. Company issues bonus share in the form of a ratio 1:3 which means a shareholder for 1 bonus share for every 3 shares held by them.

The new share are issued free of cost and are always distributed out of the company's profit. Cash flow changes the structure of share capital without any change in underlying. 

Impact of bonus issue on stock price

Bonus issue doesn't effect or change the value of investment. Bonus issue is just book adjustment. It is an exercise of sharing company's profit with shareholders without actually having to shares.

For example Mr. Kumar had 1 share of Rs 250 of ABC Ltd. during the year ABC Ltd. announced bonus of 1:1, now Mr. Kumar hold 2 shares of ABC Ltd. of Rs 125 each. Bonus issue causes a proportional fall in the value of share price.

(iii) Stock Split

A stock split is where the face value of the existing shares reduced in a defined ratio. Suppose you have a note of Rs 100 in your wallet. Now if you exchange Rs 100 against 10 notes of Rs 10.

The number of shares increased without any change in market capitalization and share capital of the companies due to stock Split. 

If a company declares a stock split of 3:1 which means that the shareholders will now 3 shares for each share held.

Impact of stock split on stock price

Theoretically, the value of an investment for each shareholders remains unaffected as the increase in number of shares is compensated by proportionate fall in share price and share price will be attracted to buy.

For example ABC Ltd company's face value is Rs 10 per share and market price is Rs 800 per share.  Before stock split number of shares 20 and after stock split number of shares 100. Theoretically, the market price of share fall from Rs 800 to Rs 160 per share.

(iv) Share Buyback

The share buyback is the purchasing of share from investors at a premium price over the market price by the company. Share buyback reduces the number of outstanding shares of the company and is considered as an important corporate restructuring method.

A company can perform buyback using any of the two methods viz tender offer or open market.

The shares can be bought back using the tender method by making an offer to existing shareholders on a proportionate basis or from the open market through a book building process or through the stock exchange or from odd lot holders.

Impact of share buyback on stock price

Theoretically, the value of an investment for each shareholders remains unaffected as the decrease in number of shares and market value of per share goes up.

(v) Right Issue

In right issue, company is rising capital through existing shareholders that means company is rising money from the people who have already invested money in it. Capital raised may be for a new department of a product, expansion purposes and repayment debts etc. 

In right issue, the share price is generally issued at a discount price than the current market price of the shares. It mainly offers to the existing shareholders to invest in the company again.

Impact of right issue on stock price

After the right issue, the market price of shares fell to accommodate the fresh issue of shares. 

For example f the company issues 1-for-2 rights issue at Rs 70 per share, shareholder ‘Mr. Kumar ’ will have right to buy one share for every two shares held by him at Rs. 70. As ‘Mr. Kumar’ has 10 shares, he can buy 5 more shares at Rs. 70.

If all shareholders subscribe to their full entitlements/rights, their proportionate ownership remains unchanged and the number of shares held by them goes up.

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