Trading the market or managing your very own share portfolio is not just about buying and selling a few shares, but rather it’s about having the knowledge so that you can make a profit while managing risk. Therefore, as technical analysts not only do you need to have the right knowledge to understand how to apply the techniques you also need to understand the market or vehicle you are trading. However, unfortunately the streets are full of those who try to forgo the required steps to learn the basics and wonder why things don’t work out for them. This reminds me how true it is that the little things can make all the difference and give you an edge in trading the market, which is why in this article I want to make you aware of an important area that you need to be on top of, and that is corporate actions. This activity will generally have an impact on the price of your shares and could turn a profit into a loss.

Now that I have your attention, just what is a corporate action?

A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company (Wikipedia). A corporate action is triggered by a decision from a company’s board of directors or shareholders, with the intent of the decision being to benefit the company and shareholders. That said, the impact on the share price will not always be positive, which is why you need to read up on corporate actions published by the company whose shares you hold or intend to trade.

As technical analysts we have a huge advantage in that we have the ability to determine what is likely to unfold in future using historical data. This means we can also look at how price behaved when certain corporate actions took place and then decide how probable it is for the stock(s) to behave the same way if the corporate action occurs again in future. For example, if you know that the probability is 80 per cent for a particular stock to fall by 1.5 times the value of the dividend on the day it trades ex of the dividend, then isn’t that useful to you? Or perhaps the stock continues to fall for at least three to five weeks from the ex-dividend date? How will this knowledge play a part in your trading strategy?

While studying corporate actions may not seem exciting to you right now, it is only when you apply what you learn that you can really make an informed decision. After all, in my experience in educating thousands of people about the market it is always those with an open mind that consistently achieve success.

To assist you on your journey I have listed some of the common classifications of corporate actions for you to look into:

•    Rights Issues – The offer of additional shares at a price determined by the company with a set time to accept the offer.

•    Off market share buy-back – The Company offers to buy some/all of your shares at a set price without charging brokerage.

•    Dividends – This is the most common type of corporate action and is the distribution of a portion of company profits to shareholders. You may be given a choice of receiving cash into a nominated bank account or receipt of additional shares through what is called a Dividend Reinvestment Plan (DRP).

•    Mergers and takeovers – A merger is the combining of two companies. As such the company you own shares in may join forces with another company and you may be issued new shares in the merged entity. A takeover is the purchase of one company by another. If the company you own is taken over you may either be offered cash for your shares and/or shares in the other company completing the take-over.

•    Share Split – Increases the number of shares in a company. This can bring the share price back to a level that is perceived by the market as more attractive. A few years ago CSL Ltd split their shares when the share price was trading close to $100. The value of the company didn’t change, however the share price was split by a factor of approximately three while the number of shares on issue increased by the same.

You can find out about corporate actions affecting the shares you own as follows:

1.    Read any correspondence the company sends you – listed companies are required by law to send all shareholders information about corporate actions.

2.    Look up the latest announcements via your online broker.

3.    Visit the ASX website at www.asx.com.au, select Announcements from the left hand navigation and enter the company name/stock code in the box provided.

4.    If you are unsure about the details of a corporate action you can contact the share registry that represents the company you invest in. You will find contact details for the share registrar at the top of your share holder statements.

To find out more on how to be successful in the share market visit our website to listen to the free podcasts in the Trading Room such as ‘Learn Share Trading - The Art of Trading Part 1, 2 and 3’.

 

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