Corporate Actions is a event that change business equity with permission of board of directors and shareholders. Without shareholders approved no company have rights to change in business decisions.
Shareholders have right to interfere in company’s main actions. Corporate actions includes Dividends, Stock Bonus, Split of Shares, Buyback of Shares, etc.
If a company is a private limited then they don’t have shareholders means retailers and easily can change any decisions of the company. But when company listed into stock market of their respective country then they need to take shareholders permissions.
Corporate Actions : Dividends
Dividend is a profit share to it’s investors when company have extra cash in the company. Dividend have three types interim dividend, final dividend and special dividend.
Interim dividend is a type in which company can give to it’s shareholders when quarterly results are out. There are four quarters in a year and any investors can get 4 times dividend in the financial year.
Final dividend are the dividend, company pay to investors when Q4 results out, before and after of annual general meeting of the company. Final dividend have more higher amount than interim dividend.
Special dividend at a special and important event for the company like going public, incorporation day, etc
Corporate Actions : Bonus Issue
Bonus Issue means giving extra shares to all the holders. Bonus issue can only be in ratio form and ratio not in fractional format. In India there is no fractional shares traded in the market. Bonus issue is the alternate of dividends.
Companies use reserves & surplus for bonus share and no extra cost to shareholders. Bonus share show that company are in good condition. whenever company announced any corporate actions, you must understand company not facing any cash flow and reserves & surplus issue.
Company reward free shares to attract investors and lower stock price. For example company announced 4:1 shares for every existing shares hold by person.
| Bonus Share | Before Bonus Issue | After Bonus Issue |
|---|---|---|
| Total Shares | 100 | 500 (400 bonus) |
| Stock Price | 200 | 40 |
| Total Investment | 20,000 | 20,000 |
| Face Value | 20 | 20 |
Total invested capital in the company remains the same while stock price down by ratio of bonus shares. Shares held increased by that ratio in this case 400 extra shares investor got.
When in future company stock make all time high you get compound interest fast means in your favor. Face value not changes.
Stock Splits
Stock split don’t require capital. Stock split happens when company want liquidity in the stock market for their stocks. It decreases face value and increases total no of shares.
For example ABC Ltd split their stock into ratio of 5:1. Here 1 is the original shares held by you and 5 is new shares you would get.
Share Buyback
Repurchasement of stocks from the offer or from the open market orders. Why companies buyback their shares ? companies like TCS, WIPRO and others arrange buyback in every 4 years of time span.
Because they believe market getting low valuation to their stock as compared to owner want. Buyback always comes with higher price than current market price of stock.
