Investors who frequently trade in the market and track market trends are well aware of the volatility of the stock market.
The stock prices are reactive to any type of news in the country. The market can surge on any good news in the economy or crash on a bad one.
It is a highly elastic platform. There are multiple factors in an economy that can influence these stock prices and most of them are unpredictable factors.
However, an intimate factor that can help investors predict the volatility is business decision.
Company’s decision and perform are yet another influential factor that determines the nature of stock price.
The company announcements are transparent subjects. This is the reason they can rule the stock prices.
A company declares its decisions to the shareholders. If you are not a shareholder of the company, you can still know about its major announcements on the websites of NSE or BSE.
If a company has good reputation and progressive nature, its stock are supposed to be blooming in the market.
This all depends upon the company decisions and action.
But what exactly is company action?
Company action includes matter related to the operation of the firm.
These decisions can be as minor as a change in price of the product or change packaging of the product and as major as merging of companies, introduction of a new product or declaring of dividends.
The company actions can be divided into two categories- monetary and non-monetary.
Monetary actions include declaring of dividends which is a decision directly related to stocks. Therefore, such decisions are bound to influence stock prices.
Non- monetary decisions include change in the logo of the company or change in the tag line of the company.
Some major company decisions that affects stock prices are:
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Shareholders receive profits of the company in form of dividends. If a company does not reinvest its profit in the company, it distributes it to its shareholders as dividends.
It is not mandatory for a company to pay dividends to its shareholders. If they feel that instead of paying dividend, they should utilize the profit to further growth of the company, they can choose not to pay any dividend.
The decision of paying dividend is taken in the annual general meeting of the company.
Bonus issue are the dividends paid to the shareholders from the company’s reserves.
These are the free shares that the shareholders gain relating to the shares that they currently hold.
These bonuses are issued in ration of 1:1, 2:1, 3:1 etc.
This can be explained as this-
If person A hold 100 share in the company and the company announces bonus issue of 2:1, ‘A’ will receive 200 free shares against 100 pre-existing share and his total share in the company will become 300.
Stock split is exactly what its name suggests. The stocks you hold are split.
This may sound the opposite of bonus issue by the company. Stock split is done by the company to increase the number of shares in the market.
However, a shareholder does not need to worry about any loss in this company decision. You do not lose anything here, your stocks are only split in the ratio suggested by the company.
This is done to encourage more retail participation in the company.
In this process, if the stock split ratio is 1:2, and you have 100 shares, your share will be split in 50 shares each. The face value will split accordingly.
Right issue means the company is issuing new shares to its shareholders. This is just like issuing of second IPO but only to the pre-existing shareholders.
However, this is not a free share issue to the shareholders. You will need to pay for buying these right issues. This is done at a discounted price.
If the ratio is 1:3, it means the shareholder can subscribe for 1 new share of 3 shares it holds.
Buy back of shares:
This method means that the company is purchasing its shares from its shareholders. It reduces the outstanding shares of the company in the market.
It also shows that the company is confident in its performance.
The bottom line
Company decisions affect the stock price to a great deal. Some of these decisions are mandatory for a company.
These decisions help companies to reward shareholders and improve their reputation and performance in the market.