Introduction

• Corporate actions can have a significant impact on a company’s share prices.
• Corporate actions directly affect the adjustments in shares.
• An investor should have good knowledge about such corporate actions and how they affect the shares.
• In this article, we will understand various corporate actions and how they adjust the prices of a company's shares.

When Do the Adjustments in Shares Happen?

• The adjustments in shares happen when the company takes corporate actions.
• A corporate action is an initiative taken by the management or the board of directors of a public limited company to introduce changes in its stock prices.
• There are two types of corporate actions: mandatory and voluntary.
• Mandatory corporate actions occur when there are investments involved, such as stock splits, acquisitions, company name changes, and the like.
• On the other hand, voluntary corporate actions require the involvement of investors. Tender offers, right issues, and optional dividends are a few examples of voluntary corporate actions.

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Which Corporate Actions Lead to Share Adjustments?

Some of the major corporate actions that lead to share adjustments are:

Bonus shares:

• These are the extra shares that the company offers to its shareholders.
• A 1:1 bonus issue means that each shareholder of the company gets one more share for each share he has.
• This action is taken to increase the liquidity of the stock.
• Bonus shares reduce the share price and make it more accessible to investors.

Right issues:

• In the event of a right issue, the company offers new shares or additional shares to the current shareholders.
• However, existing shareholders can only purchase the shares before they are offered to the public. This is done either for debt reduction or to finance the company’s expansion.
• Before applying for the right issue, it's important to peruse it properly. Having a look at the company’s earnings and management before investing in them is also helpful.

Stock split:

• This refers to the division of shares into equal portions.
• Stock splits make shares more liquid and are often declared by companies to make their shares more affordable to retail investors.
• So, more buyers and sellers trade in the stock with an increase in liquidity.
• A stock split is based on the face value of the share and is considered a non-event, as it doesn't affect the company’s equity or market capitalization.
• However, the number of outstanding shares does change.

Reverse stock split:

• Reverse Split is applied when a company decides to increase its share price.
• A reverse stock split indicates a negative image of the company and that the company’s share prices have nosedived.
• With this split, the company tries to make its stock appear stronger.

Dividends:

• A company usually shares a part of its profit with shareholders in the form of dividends whenever it earns a profit.
• Many newly established companies and startups don’t declare dividends because they prefer to invest the profits in their expansion plans.
• A dividend is declared per share or as a percentage of the face value of the share.

Buyback:

• A buyback takes place when the company decides to purchase its shares from its shareholders.
• These shares are usually purchased at a premium or at their market price.
• Companies do share buybacks to restrengthen their stake in the company.
• The reason for this is to have more control, to prevent the share price from declining, to improve earnings per share, and to create investor confidence in promoters.

Mergers and acquisitions:

• A merger takes place when two or more companies fuse into one.
• All the concerned parties need to agree to the terms and conditions.
• One company needs to surrender all its existing stocks to the others.
• On the other hand, an acquisition takes place when a company buys a majority stake in another company’s shares.

Conclusion:

• To summarise, corporate actions lead to a lot of adjustments to the shares of a company.
• As an investor, you need to understand how corporate actions affect stocks.
• This article provides you with a basic idea of the adjustments that corporate actions bring about.

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