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A corporate action is an event carried out by a company that materially impacts its stakeholders. The most common corporate actions include the payment of dividends, stock splits, and mergers and acquisitions.
Special Dividend
A Special Dividend is a one-time distribution of company assets, usually in the form of cash or in the form of additional stock. It is separate from the regular cycle of dividends and usually deviates from a company’s typical dividend payment.
Stock Split
Stock splits are a way a company’s board of directors can increase the number of shares outstanding while lowering the share price. For example: if you have 10 shares of stock XYZ and which undergoes 2 to 1 stock split, you would receive 2 new shares for every 1 share you previously owned, resulting in 20 new shares.
If the number of shares increases, the share price will decrease by a proportional amount.
If a stock traded at $100 previously, it will trade at $50 after a 2-for-1 split. Yes, you own more shares, but the value of your holdings did not change as the share price decreased.
Reverse Split
Opposite of a regular stock split, the number of shares is reduced, but the price per share increases. This is often done to meet the minimum stock price required for a company to be listed on an exchange.
If you own 10 shares of stock XYZ and the company is undergoing a 2 to 1 Reverse Split, you would receive 1 new share for every 2 shares you previously owned.
If the number of shares decreases, the share price will increase by a proportional amount.
If a stock traded at $50 previously, it will trade at $100 after a 1-for-2 reverse split. You own less shares, but the value of your holdings did not change as the share price increased.
Mergers and Acquisitions
A Merger would occur when two or more companies combine to create a new company. In these instances, the existing shareholders of merging companies maintain a shared interest in the new company. Most often, companies will make an agreement for one company to buy the other company's common stock from the shareholders in exchange for its own common stock. Shareholders receive the new shares once the merger has completed.
An Acquisition involves a transaction in which one company, the acquirer, takes over another company, the target company. This will often result in the shareholders existing shares in a target company converted to the shares of the acquiring company once the acquisition is completed.
Spin-off
Sometimes a company will choose to create a new, independent company by selling or distributing new shares of its existing business. The original company may choose to issue shares of the new independent company to the original company’s shareholders.
Delisting
Delisting is the removal of a listed security from a stock exchange. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.