By David Gass

A corporate action can be defined as a decision undertaken by the mutual consent of the board of directors of a company. A corporate action creates a direct impact on the stakeholders of the company including the shareholders and the bondholders. Companies may or may not involve the shareholders to vote for the decision taken, depending on the nature of the corporate decisions. After undermining a particular corporate action, the investor gets a better picture about the financial performance of a company. Adequate knowledge about corporate actions is essential, since investors can decide whether to deal with the particular company’s stock or not.

Different kinds of Corporate Actions

The following are some of the common corporate actions, which the companies take.

Stock Splits: Also known as a bonus share, a company divides the outstanding shares in order to boost the liquidity of its stock. Although, the stock splits have very negligible impact on the company’s equity or net assets, the number of outstanding shares increases significantly.

Dividends: These can be categorized into cash or a stock dividend. Dividends are retained earnings of the company that can be announced semi-annually, annually or quarterly. In cash dividend policy, the shareholders get a pre-decided cash dividend per share. A stock dividend is somewhat different from cash dividend, wherein the shareholders get an extra share or more for every number of shares they hold.

Rights Issue: Under this corporate action, companies issue new shares to their existing shareholders. If the response from their existing shareholders is not favorable enough, then new shares are offered to the general public. Rights issue adversely affects a company’s earnings per share, commonly known as EPS.

Mergers and Acquisitions: The most significant of all the corporate actions is a merger or acquisition by companies. Acquisition happens when a company acquires the majority shares of the target company. A company surrenders all its existing stock to the agreed company under the said terms and conditions. The stock prices of the companies involved are affected by acquisitions to a great extent. The value of the target company’s stock usually increases, whereas the value of the acquiring company’s stock decreases for a temporary period. Shareholders of the companies and regulatory authorities have to approve these consolidation activities.

In addition to these primary corporate actions there are other related events like capital reduction, conversion of securities, interest payment, minority offers and suspension. The board of directors takes these actions due to various reasons. For instance, when they find excess capital they opt for capital reduction. Similarly, suspension occurs when the company finds that a drastic change in the price of the shares is about to happen.

There are various softwares and information available in the markets that provide the necessary guidelines to educate the investors. These softwares are readily available at an economical price for the benefit of the investing community. It makes no sense to invest your hard earned money in something you are not sure will reap you the necessary benefits!

David Gass is President of Business Credit Services, Inc., founder of www.SmallBusinessConsulting.com and co-developer of the BizDoc Software which manages the records of a Corporation or LLC. For a Free Trial of the software visit www.businessdoc.com

Choosing a stock while taking an investment decision depends upon your financial goals. Corporations issue different types of stocks, the basic two types being common stock and preferred stock. Another type of classification which is commonly used is to classify stocks as growth, value or blue chip stocks, amongst others. It is important to understand the various terms clearly so that you can make a wise investment decision.

Common Stock

This is the basic stock issued by a corporation and represents the fraction of the company owned by you. Common stockholders bear the most risks associated with the company. Common stockholders get dividends only after preferred stockholders have got theirs. However, the investors holding common stocks have voting rights in the company, which enable them to influence corporate resolutions. Preferred stock holders do not have voting rights.

Preferred Stock

This is a form of equity, but has the characteristics of both bonds and common stock. As the name implies, preferred stock holders can claim the earnings and also the assets in the event of liquidation of the company, prior to common stock holders. However, the claims of preferred stock holders come after those of bondholders.

Additional Classifications

• Growth Stocks: Growth stocks are stocks of companies whose financial performance and earnings exceed the industry average and the economy in general. The profits are typically re-invested to expand the business and minimal dividends if any, are paid to stockholders. Stockholders gain because the share price goes up as the company grows.
• Value Stocks: These are stocks considered undervalued by investors. Typically, these may be stocks of companies going through a rough patch or whose growth potential has been underestimated by the market. These stocks attract those investors, who believe in long-term growth of the company. The second richest man in the world and great investor, Warren Buffet, has championed the art of value investing.
• Blue Chip Stocks: Blue Chip stocks are stocks of financially sound, well- established companies with managements having a well established track record of delivering earnings. Their stock price movements are less volatile and they pay regular dividends. Such companies have industry leadership.
• Defensive Stocks: These stocks provide stability in stock price during periods of recession, economic slowdowns or slow down in industries. Consumers continue to buy food, medicines, gas and electricity even during slowdowns and stocks of companies dealing with these sorts of goods do not lose much value during rough patches in the economy.
• Cyclical Stocks: Cyclical stocks are stocks of companies which perform along with business cycles. When the business cycle is in an upturn, the value of the stocks of companies related to the particular industry would appreciate rapidly, offering windfall gains. Commodities, airlines, durable goods manufacturers fall in this category. However, these stocks lose value during downturn in business cycles.
• Income Stocks: These are especially suited for investors looking for a greater proportion of current income of companies. Income stocks offer a higher dividend in relation to their market price. Blue-chip companies and utilities like banks fall in this category.
• Seasonal Stocks : Stocks of such companies fluctuate with seasons. Examples are stocks of retail companies, greeting card companies which have a greater proportion of sales during festive seasons.

Penny Stocks : These are low value stocks, typically with a value in the range of $1 to $5 per share and are traded Over-The-Counter (OTC). They are highly speculative and high risk investments.

Managing a corporation is no easy task, as is managing the various corporate documents that are used on a day-to-day basis in order to run the company. These corporate documents have to be recorded and filed, as it is necessary for a corporation to maintain records for a minimum of 6 years at least. The documents are proof that all the activities of the corporation are carried out as per the directive of the board of directors and the shareholders. A proper and efficient filing system is of paramount importance to make sure all the documents are safe from the dangers of theft as it can cause great harm to the company, if confidential matters are lost due to inadequate security.

Kinds of Corporate Documents:

When the company has been incorporated, the article of incorporation is the first basic document, which is the proof of the creation of the company. It is the documented proof of the corporate purposes and its powers, authorizing capitalization of stock and has to be filed with the Secretary of State after an appropriate fee has been paid and it has been notarized and signed by the incorporators. The certificate of incorporation is issued after being duly signed by the Secretary of State declaring the corporation to be a legal body as of its date of incorporation. Then there is the consent of Agent for service of process for the jurisdiction where the company was incorporated. The bylaws and the amendments of the articles of incorporation adopted by the corporation are other important documents. The minutes of all meetings and the consent in lieu documents, notices and waiver of notices, alphabetical list of shareholders for a meeting and proxies for a meeting are the next set of important documents. Letters addressed to the shareholders, resignation letters of directors, secretary certificates and shareholders agreements are other documents that are documented and kept safe by the corporation. Copies of share certificates issued are also filed and documented, as is the stock ledger with the folio pages, providing information regarding the name, address, date of issue, to whom it is issued, documents with the share holder’s signature acknowledging the receipt of the certificates. The stock ledger is maintained to know exactly who owns each share of the corporation currently. It is updated regularly with documented proof of such actions as transfer of share, if it is an original issue of share, or if the share has been received as a gift from another share holder, if the shares have been transferred from a deceased shareholder to his estate or a joint survivorship agreement makes the joint owner of the shares the new single owner of all the jointly held shares etc. Another important document associated with shares is the stock subscription agreement.

The company has to deal with a lot of legal documents such as government related documents such as franchise tax renewals, license renewal, a report of the company’s annual meetings etc.

The company has to document the financial records as well and maintain a current balance sheet, a profit and loss statement document, a host of other documents related to the corporate finance such as bank statements, records of all payments made for transactions, the fees received and the scale of pay of each of its employees, there are documents concerning dividends and the type of dividend agreed on by the board of directors and the shareholders, the various resolution that are proposed, those that are accepted and passed by a quorum of directors, the resolutions that are rejected, documents relating to bank transactions such as borrowing, relating to insurance etc. There are legal documents relating to the hire, purchase, lease and renting of assets, processes of litigation, bankruptcy filing etc. Documents relating to the S-corporation status are also important for a corporation.

Numerous softwares are available in the market online to help document and file these important documents of a corporation, with just a mouse click.