What are Corporate Actions? Understanding Key Events in the Stock Market

In the world of stock market investing, you may often come across the term corporate actions. But what does it really mean? How do these actions impact your investments? Whether you are a beginner or an experienced trader, understanding corporate actions is crucial to managing your portfolio effectively.

In this blog, we will explain what corporate actions are, the types of corporate actions you need to know about, and how these events can affect your stock holdings.

What are Corporate Actions?

A corporate action refers to any event initiated by a company that impacts its shareholders or securities. These events can either be voluntary (requiring action from the shareholders) or mandatory (requiring no action from the shareholders). Corporate actions can impact the price, value, or ownership structure of a company’s shares and can influence an investor’s portfolio.

For example, if a company decides to issue bonus shares, it is a corporate action that can affect your number of shares but not the overall value of your investment (unless the stock price changes as a result). Similarly, when a company announces a dividend, it is distributing a portion of its profits to shareholders, which directly affects the cash flow for investors.

Types of Corporate Actions

There are several types of corporate actions, each with its own impact on your investments. Let’s break them down:

1. Dividends

A dividend is a portion of a company's profits distributed to its shareholders. This can be paid in cash or additional shares (called stock dividends). Dividends are usually announced quarterly or annually. For example, if Reliance Industries announces a dividend of ₹10 per share, and you hold 100 shares, you will receive ₹1,000 in cash.

Example: Let’s say Tata Consultancy Services (TCS) declares a dividend of ₹30 per share. If you own 50 shares, you will receive ₹1,500 as a dividend payout.

2. Bonus Shares

Bonus shares are additional shares given to existing shareholders for free, based on the number of shares they already hold. This increases the total number of shares outstanding but does not change the overall value of your holdings. It’s like receiving free shares, which can be useful for increasing your stake in the company.

Example: If HDFC Bank declares a bonus issue of 1:1 (one bonus share for each existing share), and you own 100 shares, you will receive an additional 100 shares at no extra cost.

3. Rights Issue

A rights issue is an offering of new shares to existing shareholders in proportion to their current holdings, typically at a discount to the market price. Shareholders have the right to subscribe to the new shares, but they are not obligated to do so.

Example: If ICICI Bank announces a rights issue offering 1 share for every 5 shares held at a discounted price, you have the option to buy new shares at the discounted price. If you own 100 shares, you can buy 20 more shares at the discounted price.

4. Stock Split

A stock split is when a company increases the number of its shares by issuing more shares to its current shareholders. For example, in a 2:1 stock split, you would receive 2 shares for every 1 share you already own. While this does not affect the value of your investment (since the price per share reduces), it does make the stock more affordable for smaller investors.

Example: If Bajaj Auto announces a 2-for-1 stock split and you own 50 shares, you will receive an additional 50 shares, bringing your total shares to 100. The price per share will be halved, but your total investment value remains the same.

5. Mergers and Acquisitions

(M&A) When one company merges with or acquires another, it is known as a merger or acquisition. This can lead to significant changes in the stock price, as the value of the new merged entity or the acquiring company is reassessed. Shareholders of the companies involved may receive new shares, cash, or a combination of both.

Example: If L&T (Larsen & Toubro) acquires Mind tree, as a shareholder of Mind tree, you may receive L&T shares or a cash offer in exchange for your Mind tree shares.

6. De-merger A de-merger occurs when a company divides itself into two or more independent entities. Each shareholder will receive shares in the newly created companies based on their existing holdings.

Example: If Dabur India demerges its food and beverage business into a separate company, existing Dabur shareholders will receive shares in the new company in proportion to their current holdings.

7. Buyback

A buyback is when a company repurchases its own shares from the open market. This can help increase the value of the remaining shares by reducing the number of shares in circulation. It is often done to improve the company’s earnings per share (EPS) and provide support for the stock price.

Example: If Infosys announces a buyback of 10% of its shares, the company will repurchase shares from investors at a specified price, which can lead to a rise in the stock price for remaining shareholders.

8. Dividend  Reinvestment Plans (DRIPs)

A dividend reinvestment plan (DRIP) allows shareholders to reinvest their cash dividends into additional shares of the company instead of receiving cash payouts. This can be a convenient way for investors to increase their holdings without needing to purchase more shares manually.

Example: If Hindustan Unilever (HUL) offers a DRIP, and you hold 50 shares, your dividend will be used to purchase additional shares of HUL instead of receiving cash.

How Do Corporate Actions Affect Your Investments?

Corporate actions can impact your stock portfolio in various ways, both positively and negatively:

1. Dividend pay-outs can provide you with a source of income, especially if you invest in dividend-paying stocks.

2. Bonus shares and stock splits can increase the number of shares you own, but they won’t necessarily change the value of your total investment unless the stock price changes.

3. Mergers and acquisitions may offer you an opportunity to gain from the new, combined entity or receive a cash offer for your shares.

4. Buybacks can improve the market value of your shares by reducing the total number of shares outstanding.

5. Rights issues allow you to buy shares at a discount, but you may need to raise additional funds if you want to take advantage of the offer

How to Stay Updated on Corporate Actions

To ensure you don’t miss out on important corporate actions, investors should:

1. Monitor Company Announcements: Stay updated by regularly checking company websites or stock exchange notifications.

2. Use Brokerage Services: Most brokers send notifications about corporate actions affecting the companies in your portfolio.

3. Check your Demat Account: Your demat account will reflect any changes in the shares you own due to corporate actions.

Conclusion

Corporate actions are a vital part of the stock market that can significantly affect your investments. From dividends to bonus shares, understanding these actions helps you make informed decisions and manage your portfolio more effectively. At RISEVESTORS, the best stock market institute in Meerut, we ensure that our students and mentors are well-equipped to handle such events, offering practical insights to help you become a more skilled investor.

Join our best stock market course in Meerut and learn everything you need to understand corporate actions, stock market dynamics, and more, from our experienced tutors and mentors.

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Disclaimer: This blog is for educational purposes only. Please consult with a financial advisor before making investment decisions.