Corporate actions – How do they impact you as a shareholder?
March 13, 2023 • 4 min read
What we'll cover
Different corporate actions a public company may take and why
How corporate actions could impact your shares
What happens to stock if there is a merger or acquisition
Often public companies and their board of directors make decisions that may result in material changes to their stock price, ticker symbol and/or the stock’s total return. These are referred to as corporate actions. Companies announce these moves about their stock ahead of time, but you might be surprised if you missed the news and then check your brokerage account after the fact.
To help you better understand corporate actions, here’s a look at the different types and what they mean for your investments.
What is a stock split?
When a stock split occurs, the number of shares you own increases and the price of the stock decreases — but the total value of your holdings stays the same. This action does not dilute the percent of the corporation that you own. For example:
A company could do a 2-for-1 stock split. That means you would get 2 shares for each one you own.
A company could do a 3-for-1 stock split. That means you would get 3 shares for each one you own.
Corporations may take this action to reduce the price of its stock to make it more attractive to investors. This could lead to increased demand and liquidity in the stock.
What is a reverse stock split?
When a reverse stock split occurs, the number of shares you own decreases and the price of the stock increases, but the total value of your holdings stays the same. This action does not dilute or increase the percent of the company that you own. For example:
A company could do a 1-for-3 reverse stock split. That means you would divide the number of shares you own by three to get to the new number of shares you own. And you would multiply the price of each share the day before the split by 3 to get the new price of your security.
So, let’s say you owned 99 shares of a $15 stock. If the company announced a 1-for-3 reverse stock split, you would own 33 shares worth $45 each after the split. But the total value of your holding would remain the same before and after the reverse stock split: $1,485.
A company may take this action to meet a minimum stock price requirement to be listed on a stock exchange.
What is a dividend?
A dividend is a distribution of a portion of a company’s profits to its shareholders. The payment is typically made in cash and is paid regularly (usually quarterly) to shareholders as of a certain date (the ex-dividend date).
When you receive a cash dividend in your Ally Invest account, it will automatically be added to your cash balance, unless you are enrolled in our dividend reinvestment plan (DRIP), which automatically takes your cash dividends and uses them to purchase additional shares of your investment.
Some companies give shareholders stock dividends (instead of cash dividends). Usually stock dividends are paid in percentage terms. For example:
A 10% stock dividend means the company will pay you 0.10 shares for each share you own on the ex-dividend date. At this percentage, if you own 100 shares, you would receive 10 shares when the stock dividend is paid.
When you receive a stock dividend at Ally Invest, those new shares will be placed directly into your account on the day that it is paid.
What if a company goes through a merger or acquisition (M&A)?
When a public company merges with another company or is acquired by another company, the ticker symbol of the stock you own could change. For example:
You own shares of Company Z. If Company Y merges with (or acquires) Company Z, you could receive stock of Company Y for the shares you own in Company Z. After the merger is complete you will no longer own Company Z shares.
Alternatively, a new ticker symbol could be created for the newly merged company. In this situation, you will receive a pre-determined number of shares of the new Company YZ for each share you owned of Company Z. After the merger is complete, the new ticker symbol and share count will be reflected in your Ally Invest account.
In some instances, cash is a part of a merger or acquisition agreement. If that’s the case, you may also receive cash for the shares of Company Z you owned, plus shares of the acquiring company or the new merged company. That cash will be automatically added to your Ally Invest account the day the merger/acquisition is complete.
Sometimes trading of shares of the companies involved in a merger or acquisition are halted the day the announcement is made. And trading of shares of the new company may be halted on the day the merger is completed (or becomes effective).
If you only learn that a stock you own splits (or experiences a reverse split or is involved in a merger or acquisition) after the fact, you may have some initial concerns. But you shouldn’t worry, as corporate actions are a part of normal market activity. If you are an Ally Invest customer and you have questions about corporate actions involving stocks you own, don’t hesitate to reach out. We’re here for you.