Loading ...
Thursday, March 23, 2023
What are corporate actions and how do they impact stock prices?
By Century Financial in 'Blog'
.jpg)
On March 20, 2023, UBS (UBS) announced plans to acquire Credit Suisse Group AG (CS) in an emergency rescue deal. On that day, the share price of Credit Suisse Group dropped, thereby impacting shareholders. This is an example of a corporate action undertaken by UBS and demonstrates how such actions can significantly influence share prices.
What are corporate actions?
In the business world, for better or worse, a company’s future is determined by its corporate actions. And a better understanding of how the corporate action life cycle works will help give an idea of how a company conducts its business and manages its financial health.
Corporate actions are initiatives taken by the Board of Directors of a company with the approval of shareholders. The decisions made can have a substantial impact on a company and its stock price. It could be something like rebranding and changing a company’s name to deciding to declare dividends. Other examples of corporate actions include mergers and acquisitions, share buybacks, and stock splits.
Corporate actions can be broadly categorized into two types based on their impact - monetary and non-monetary. It means that some corporate actions have a financial impact while others don’t.
So, let us look at the type of corporate actions that influences online trading activity and how:
Dividends
A corporate action can include a company that pays out dividends. This is basically where a company pays shareholders a portion of its profits or reserves as a form of income. In most cases, dividends are paid per share basis or a percentage of the share’s face value.
Bonus Issue
Another way companies take corporate action is through the issue of bonus shares where additional shares are issued to shareholders. A common example is a 1:1 bonus issue, where investors get an additional share for every share they own. But how is the market capitalization of a company affected when a bonus issue is made?
While bonus issues increase the number of shares held by investors, they also decrease the market price of each share. As a result, the market capitalization of the company remains the same. The allotment of bonus shares is done in accordance with each shareholder’s stake. Thus, bonus shares are issued in a constant ratio, thereby leaving the relative equity of each shareholder undiluted.
Stock Split
Well, just like the name suggests, a stock split occurs when a stock is split into two or more portions. Working on the same principle as a bonus issue, here, the number of shares increase, but the value of the investment remains the same.
There are several reasons for companies to initiate corporate actions such as enhancing participation of retail investors, influencing share price and liquidity, returning profits to shareholders, and corporate restructuring.
Rights Issue
When a company initiates a rights issue, it essentially encourages existing shareholders to purchase additional shares in the company, typically at a discount to the market price. Companies usually use the proceeds from a rights issue to finance an expansion project, acquire new assets, or reduce debt. So, if investors are offered these rights issues, they need to do their research and be confident about that company’s future.
Buyback of Shares
When a company decides to repurchase its shares, it is generally a positive sign as the company seems confident about what it is doing and its future. This facilitates the return of profits to shareholders in a more tax-efficient manner than paying dividends.
Other reasons for buying back shares include:
Preventing another company from taking over
Preventing the share price from dropping further
Building confidence
Ownership consolidation
Lowering cost of capital
Improving key financial ratios
A sudden rise or fall in the price of a stock can be the result of corporate actions, and that is why understanding them, and their impact is important.
This marketing and educational content has been created by Century Financial Consultancy LLC (“Century”) for general information only. It does not constitute investment, legal, tax, or other professional advice, nor does it constitute a recommendation, offer, or solicitation to buy or sell any financial instrument. The material does not take into account your investment objectives, financial situation, or particular needs.
The opinions expressed by the hosts, speakers, or guests are their own and may change without notice. Information is based on sources we consider to be reliable; however, Century does not guarantee its accuracy, completeness, or timeliness and accepts no liability for any loss arising from reliance on this content.
Trading and investing involve significant risk, and losses may exceed initial deposits. Past performance is not indicative of future results. CFDs and other leveraged products are complex instruments that may not be suitable for all investors. Please ensure you understand how these products work, the associated risks, and seek independent professional advice if necessary.
Century is licensed and regulated by the UAE Capital Market Authority (CMA) under License Nos. 20200000028 and 301044.
Please refer to the full risk disclosure mentioned on our website.
__1439480927.jpg)
Regulated by SCA
Century Financial Consultancy LLC
.png)
.png)
.png)
.png)
Reach us:
-
Dubai
6th Floor, Emaar Square Building 4,
Downtown, Dubai, P.O. Box 65777,
Dubai, United Arab Emirates -
Abu Dhabi
27th Floor, Office 2701,
Shining Towers, Abu Dhabi, UAE -
Sharjah
29th Floor, Office 2905,
The Business Tower, Sharjah, UAE - +971 (4) 356 2800
- info@century.ae
Disclaimer: Trading in financial products carries substantial risk. Leveraged over-the-counter (OTC) derivatives, such as Contracts for Difference (CFDs) and spot forex, may result in losses exceeding initial deposits and may not be suitable for all investors. These complex instruments do not confer ownership of the underlying assets. Investors should carefully consider their investment objectives and risk appetite, and seek independent professional advice if necessary.
Century Financial Consultancy LLC (CFC) is licensed and regulated by the Capital Market Authority (CMA) of the UAE under license numbers 20200000028 and 301044 to carry out the activities of Financial Products dealer, Trading Broker in international markets, Trading Broker of OTC derivatives and currencies in the spot market, Introduction, Financial Consultations, and Promotion. CFC is incorporated under UAE law, registered with the Dubai Economic Department (No. 768189), with its office at 601, Level 6, Building No. 4, Emaar Square, Downtown Dubai, UAE, PO Box 65777.
The content on this website is provided solely for informational and educational purposes and does not constitute an offer, recommendation, or solicitation to buy or sell any securities or financial products.
Products and services offered by CFC are not intended for use in any jurisdiction where such use or distribution would breach local laws or regulatory requirements.
⚠️ Alert: Fraudulent Activity Notice
Century Financial Consultancy LLC (“Century”) has become aware of fraudulent individuals and entities impersonating our firm through unofficial websites, social media channels, and messaging applications such as Telegram, WhatsApp, and Discord.
Please be advised:
- Century does not manage investments on behalf of clients.
- Century does not solicit funds or guarantee investment returns.
- Century does not accept or make payments in cash, cryptocurrency, or digital assets.
- We do not conduct business via social media or messaging platforms.
Our only official website is www.century.ae, and all communication is conducted exclusively through verified channels.
We strongly urge the public to remain vigilant, verify the authenticity of any communication claiming to be from Century, and report any suspicious activity. Century disclaims any responsibility for losses arising from dealings with unauthorised or fraudulent parties.
