Effect of corporate actions in trade market
Corporate actions are activities initiated by companies that directly or indirectly impact the stakeholders. The decisions to bring about such actions are usually taken by the board of directors and are authorised by the shareholders. Following are a few significant corporate actions and their impact on the trade market.
Bonus shares are free shares issued against the shares already held by the company’s shareholders. They are usually issued in the ratio 1:2, 1:3 and so on. After the bonus issue, the number of outstanding shares increases and hence, the value of each share decreases. As a result, many people could afford to buy shares in the company, eventually increasing retail participation.
Under the rights issue, instead of approaching the public, the company offers shares to its existing shareholders at discounted price in order to raise fresh capital. By subscribing to the rights issues, a shareholder can maintain the same ownership as before. Also, in case of rights issues, the cost of incurring fresh capital becomes low for the company.
Buyback of shares
A company has an option to buy its shares back from the investors in the market. A company usually does this to consolidate its stake and prevent others from taking over. As the outstanding shares decreases, the profitability per share increases.
Dividend is nothing but distribution of company’s profits among the shareholders. Payment of dividends increases the confidence among the investors and stabilises the share price.