When you buy equity shares in a company, you become owner of the company to that extent. It really does not matter how small your share is but you become the owner for the percentage of shares you now hold in the company. If you look at the definition of equity shares, then it will also suggest the same thing. It says, “An equity share is the share in the overall share (ownership) of a company.” Now, most of the people when they buy shares, they get more interested in the current and capital gains accruing from transacting in the shares. That is, vast majority of people keep their eyes open on secondary market. What about your ownership and the associated rights in the company that you have got by virtue of being the owner of shares of that company. In this article, you will learn the importance of being aware of what is happening in the company, who are taking decisions in the company. If you remain vigilant on the vital things taking place in the company, you can earn more.
Despite the fact that you are an owner of the company, you cannot participate in the decisions of the management of the company on a day to day basis. The company is run by a team of persons who is known as management of the company and it is their decisions and actions that benefit the investors. These decisions and actions are known as corporate actions. There are different kinds of corporate actions and accordingly their impact on the prices of the shares is also different.
Role of Corporate Actions
The steps which are taken by management that are expected to impact the security of a public limited company is known as corporate actions. It is the ultimate goal of a company to maximize the wealth of its shareholders. In order to achieve this objective, the various corporate actions taken by its management are dividend payout ratio or dividend distribution, stock split, buyback of shares, rights issue, corporate restructuring (mergers and acquisitions). Let us now understand the impact of all these corporate actions on the share prices.
Dividend is a part of the earnings available to equity shareholders (earnings available to equity shareholders after interest, taxes and preference dividend), that is distributed to them. The sooner the news will hit the market that the company is declaring dividend, the prices of the shares will go up. You can also benefit from this. Prepare a list of the companies that pays good dividend along with the quarter during which they declare dividends and invest in the shares of these companies before their dividend declaration date. This way you can benefit from appreciation in the price of the shares.
When the company purchases its shares back from the market, it is known as buy-back. This reduces the number of shares in the market and the result is higher EPS (earning per share is earnings available to equity shares divided by the number of shares). If you know that the company is undervalued and has announced buyback of its shares, then you should seriously invest in this company. Because, when there will be an improvement in the market condition, the share prices will go up and you can book profits by selling them at a rate higher than what you have purchased at.
Stock split or reverse split
When a company feels that the price of its share is too high or too low, then the company may go for stock split or reverse split. This increases the liquidity of the shares and will bring either increase or decrease in the number of shares. Depending upon the other factors like growth prospects of the company, reputation of the company, etc., one can invest in the company at this stage.
When a company comes up with another lot of issuance of its shares, then it can first give the opportunity to the existing shareholders to purchase the shares from the new lot before it goes to be sold in the open market. This is known as rights issue. If the offer price is less than the market price, then one can purchase the additional shares.
When a company merges with the other company or acquires another company, it is known as corporate restructuring. During acquisition, the acquiring company normally pays premium to the target company which results in decrease in the share prices of the acquiring company for short term. Therefore, shares purchased at this time can benefit the investor at a later stage when the prices of shares will achieve their normal position again.
So, keep an eye on the company as well and earn profits.