What You Should Know About Corporate Actions

An investor needs to be aware of how every individual action taken by the organization can impact investments and be able to make valid decisions based on them.

Corporate actions, at the very basic level, are actions taken by companies. A corporate action can really be anything. As the name implies, it is an event or action that is brought about by a company. The action, which is issued by the company, brings about a form of material change in the equity or debt position of the company and impacts its stakeholders, especially shareholders.

As such, it directly affects the securities issued by the company. They could be monetary either monetary like the announcements on dividend payment or non-monetary like stock splits.

They could also be either mandatory or voluntary. For mandatory corporate actions, their effects are automatically applied to the investments. Examples of this can be as simple as company name changes.

Voluntary corporate actions on the other hand requires an investor’s response before it could be applied and an example of this is a right issue. Corporate actions are generally decided on by a company's board of directors and authorized by the shareholders.

Because of how wide corporate actions could be, they directly affect the stock market, the investors, as well as other stakeholders. In fact, just as information on the efficient market hypothesis is said to prompt a reaction by the market, a corporate action would certainly drive change.

For the investor, the first impact of a corporate action is the share price of the company and it is important for the investor to have total understanding of it as this is tied to the overall profitability and value of his or her investments.

The impact on a stock price is dependent on the rationale for the action and the action itself. As such, an investor needs to be aware of how every individual action taken by the organization can impact investments and be able to make valid decisions based on them.

This is especially because unlike other kinds of information, corporate actions could show you a serious issue or financial matter in an organization. It could alter the financial structure of a company and even affect the time horizon for the company’s future.

Before a company finally announces its bankruptcy, it might have had other actions taken and only a sensitive investor with a clear understanding of cause and effect, would be able to see it before hand and make valid decisions.

As an investor, you must be able to assess every corporate action and how it impacts the share price and performance of your stock investment directly or indirectly, now and in the immediate future.

In the next few posts, we would review different corporate actions and how they affect the investor.

Written by Lawretta Egba.