Corporate actions in share market and impact on prices

Corporate Actions 

Corporate actions are financial decisions taken by a company that can affect its stock price. Knowing the different initiatives an entity can take will provide an insight into its financial position, helping to ascertain if their stock should be bought or sold.

This chapter will explore the influence of the five most critical corporate actions on stock prices. Every corporate action is initiated by a board of directors and ratified by shareholders.

Dividends

Dividends are a way for companies to share their profits with their shareholders. For instance, Reliance Industries recently declared a payout of Rs.55/- per share. So, if you own 100 shares of Reliance Industries, you can receive an income of Rs. 5,500/- as dividends (100*55). The company will transmit the payment directly to your linked bank account through your Demat account. 

Paying dividends each year isn’t compulsory. If a business feels investing money into a new project is its best option, they have that choice. It’s common for young, rapidly growing firms to keep cash on their books rather than pay out dividends to shareholders; however, when growth slows, and there’s money left over, it makes more sense to give it back in the form of stock dividends instead of keeping it in the company. Distributing these could be the most beneficial move for the corporation.

Dividends needn’t be limited to profits only – they can still be paid when the company experiences a loss, based on its cash reserves.

At the Annual General Meeting, the company’s board members make a decision about dividend payments. Subsequently, the shares are traded during the year, making it difficult to pinpoint those eligible for dividends. To better understand this process, refer to the following timeline.

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Dividend Declaration Date:

The AGM is when the dividend issue is approved by the company’s board, thus marking the dividend declaration date.

Record Date: 

The record date is when the company reviews its shareholder register to identify all shareholders who are entitled to receive the dividend. This usually happens about 30 days after the declaration of the dividend.

Ex-Date/Ex-Dividend date: 

The ex-dividend date is typically set two business days before the record date. To be eligible for the dividend, individuals must own the shares before this date. This is important to note, as in India, trades on equity are settled after two days. Therefore, purchasing the shares before the ex-dividend date is necessary to receive the dividend.

Dividend Payout Date:

The date on which shareholders, who are listed in the company register, receive their dividends is known as the dividend payout date.

Cum Dividend:

The shares remain cum or with dividends until the ex-dividend date.

When a stock goes ex-dividend, the share price typically decreases to reflect the amount of money paid out as dividends. For instance, say ITC is trading at Rs. 335, and they declare a dividend of Rs. 15.

On the ex-date, their stock price should drop to Rs. 320 in order to account for the funds that have now left the balance sheet due to the dividend payment. That being said, there are some cases where you may not observe a significant drop.

Sometimes, the company pays a special dividend that is non-recurring and only happens on an individual occasion. It’s usually a large payment compared to what you would typically receive as a regular dividend, and this can lead to a significant drop in stock prices. 

However, this should not be viewed negatively since it results in a cash payment to an investor.

Lastly, dividends can be paid at any given time during the fiscal period. This is known as an interim dividend if paid at any time other than the year-end, whereas a final dividend is when it is declared at the end of the financial year.