Corporate Action
Corporate action is any event which brings material changes to the company and the investors including shareholders and bond holders.
These events are approved by the board of directors of the company, and sometimes, shareholders are also included in the voting.Examples of corporate action events could be splits, mergers, dividends, name change, spinoffs and acquisitions.
Sometimes the company might split its shares and distribute it among all shareholders. Bondholders might also benefit from corporate actions for new debt insurance or new calls. In majority of cases, corporate actions will change or bring new position in the security of the cost basis (original amount paid by the investor).
It is totally up to the investors to deal with all necessary changes and adjustments for every cost basis security. It is but obvious that an investor will encounter corporate action event sooner or later, as 6,000 corporate actions takes place every year which brings significant changes to the cost basis stocks. Some corporate actions are very easy to manage while some require excessive calculations. Each corporate action has its own set of rules which the investors should study and implement in their Schedule-D Form.
Types of Corporate Actions:
Merger: Merger is an event when 2 companies join hands with each other and form one company. This merger could be non taxable or taxable in nature. In case of taxable merger, the shareholder has to realize artificial sales and repurchase all the securities again. If the merger is non-taxable, then the shareholders have to allocate new securities on their cost basis.
Spin Off: Spin off is an event when the company splits its assets to form a completely new public company. In this scenario, the stockholders of the parent company receive shares of the new company as a stock dividend.
Stock Split: Stock split is an event when the company changes its share count and adjusts the price of its new shares. Stock splits are generally changes to the cost basis, and the count of new shares which are mostly non taxable. One of the common scenarios of stock split is of doubling the share count that is, the shareholders doubles up their total number of shares.
Purpose of Corporate Action:
- Profit: Shareholders are rewarded with bonuses and rewards.
- Share Price: Too high or too low prices of stocks are not good signs of investments and also, the liquidity of share hampers too, hence, corporate actions will benefit the company as well as shareholders.
- Restructuring: Companies are restructured to increase their profitability.