What is the impact of corporate actions on stock prices?
The corporate actions that impact a company's stock price mainly include:
- Dividends: Dividends are a portion of profits distributed to shareholders. They are paid as a percentage of the face value of a share.
After the ex-date of an announced dividend, the stock price usually falls in proportion to the dividend to be paid. This is because dividends are issued as a cash payout and are no longer held as profits/reserves with the company. Hence, the stock price adjusts based on this. In general, dividends do not have a considerable impact on a stock's price. However, a significant change can be observed in the case of special/abnormal dividends, which are larger than regular dividend payouts. - Rights Issues: A rights issue involves the company inviting existing shareholders to purchase additional shares in proportion to their existing holding. The shares are issued at a discounted rate as compared to the current market price.
- Bonus Issues: A bonus issue involves a free issue of shares offered to existing shareholders. The bonus shares are distributed in proportion to existing holdings. Since the market capitalisation of the company and the face value of the shares do not change, the stock price tends to fall to the extent of the issue.
- Stock Splits: A stock split is wherein a company splits existing shares into multiple shares. The primary motive of a stock split is to increase liquidity and make shares more affordable to small investors. Here, the market capitalisation of the company remains unaffected and the face value of the shares changes in proportion to the split.
- Buybacks: In a buyback, a company repurchases a portion of its shares from the public (investors), usually at a price higher than the prevailing market rate (at a premium). A buyback generally indicates the company’s confidence in itself and hence, this usually impacts its share price positively.
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