These circumstances are referred to as corporate actions, and they can often affect the share value of a company, or even the ability of a particular company’s security to trade. Stash wants to help you learn about these events in a company’s life.

The following articles can help you understand all the different types of corporate action.

The post Learn About Corporate Actions appeared first on Stash Learn.

How does stock trading work?

Trading refers to the mechanism for buying and selling stock—also known as shares. Stocks are little bits of ownership in a company. Investors can trade stocks in two ways:

• on an exchange, such as the NYSE or Nasdaq
• over-the-counter (OTC)

There are a number of requirements for being listed on a stock exchange, and the stipulations vary among exchanges. For example, most exchanges mandate that a company’s stock price exceeds $1 per share to be listed initially and remain listed on the exchange, plus require that the stock meets a minimum market capitalization.

Sometimes, a stock might not live up to the requirements to get listed on an exchange—and listed stock can be delisted if it no longer meets the conditions. A delisted stock’s ticker is typically changed to a five letter symbol. For example, if the ticker was CRC when it traded on an exchange, the new ticker might be CRCQQ.

What’s an OTC stock?

Trading of OTC stocks is conducted by wholesale traders and market makers who specialize in buying and selling OTC stocks. These institutions either match buy and sell orders from investors or fill orders from their own inventory after investors choose what OTC stock to buy. 

If you’d like to learn more about the networks some dealers use for trading, the Financial Industry Regulatory Authority (FINRA) website offers a great deal of information. FINRA is a self-regulatory, membership-based organization.

What are the risks if you buy OTC stock?

Before you start making a plan for how to buy OTC stock, you may want to be aware that these stocks are almost always considered a high-risk investment. What an OTC stock seems to offer is an accessible way to start investing, but Stash recommends avoiding OTC investments altogether due to the high risks.

Some people, however, feel enticed by the idea of “penny stocks”—most of which are OTC stocks—and the allure of very low share prices. If you think you might want to buy OTC stock, you may want to carefully consider several risks:

• Lack of information. It can be difficult to get complete information about OTC stocks, which makes buyers more vulnerable to bad investments. Why? Companies whose stocks trade OTC are subject to fewer reporting requirements and regulations than exchange-traded stocks, although recent regulatory changes are intended to provide more information to investors.
  
• Unclear cost. In some cases, the price an investor receives when they buy or sell an OTC stock may vary significantly from the last price at which it traded.
  
• Greater volatility. OTC stocks generally have fewer investors trying to buy or sell at any given time. Limited demand reduces their liquidity—meaning it’s harder to convert the stock you own to cash by selling it—which drives volatility.
  
• Fraud and scams. Due to minimal reporting requirements and the limited liquidity of OTC stocks, investors may be more vulnerable to price manipulation and potential fraud. The SEC has identified a number of red flags that may help investors spot OTC stock fraud. 

Your portfolio: What’s OTC stock got to do with it?

Ultimately, your investment decisions are your own, and all investing involves the risk that you could lose money. If you choose to include OTC stock in your portfolio, extreme caution is generally warranted. 
Knowing the risks, what’s an OTC stock have going for it? For many people, the appeal may simply be the sense of accessibility. When you see stocks like Alphabet Inc. (owner of Google)  trading above $2,000 per share (as of October, 2021), it can feel daunting to start investing. But you don’t have to start with a large sum to get in the investing game with OTC stocks. An alternative to investing in an OTC stock is to invest in fractional shares, where you buy pieces of shares—even high-value stocks traded on an exchange. With a Stash account, you can start investing in fractional shares (as well as exchange-traded funds) with any amount of money. Because having access to investing shouldn’t mean you have to take on more risk than you’re comfortable with.

The post What’s an OTC Stock? Low Prices, Risky Business appeared first on Stash Learn.

1/6

Do You Know the Ins and Outs of Corporate Actions?

 

Which bankruptcy filing results in the complete liquidation of a business?

Chapter 7

Chapter 11

Chapter 7 bankruptcy results in the complete liquidation of a business. That means the business stops all operations, and its assets, or what it owns, are sold off.

2/6

Do You Know the Ins and Outs of Corporate Actions?

 

Generally, a company is delisted from a stock exchange when shares of the company fall below ____.

$10

$5

$1

$0.50

Different exchanges have different rules, but generally speaking, when a company’s share price falls below a threshold of $1 for an extended period of time, the stock may get delisted.

3/6

Do You Know the Ins and Outs of Corporate Actions?

 

What might a company do in order to increase its share value and avoid getting delisted?

A stock split

A reverse stock split

A reverse stock split is when a company reduces the number of shares it has for sale, which can drive up the price of those shares. It’s the opposite of a stock split, when a company increases the number of shares it has for sale.

4/6

Do You Know the Ins and Outs of Corporate Actions?

 

When a stock gets delisted, it might be traded over-the-counter. OTC stocks are also known as _________.

Penny stocks

Bronze stocks

Dollar stocks

Paper stocks

An over-the-counter (OTC) stock is only traded by wholesale dealers and market makers who specialize in trading that stock. It’s sometimes called a penny stock, because it can trade for less than a dollar per share.

5/6

Do You Know the Ins and Outs of Corporate Actions?

 

The merger between Sprint and T-Mobile was an example of a _____ deal.

All cash

All stock

Spin-off

Stock-cash

The T-Mobile and Sprint merger in early 2020 converted all Sprint (S) shares to shares of T-Mobile (TMUS).

6/6

Do You Know the Ins and Outs of Corporate Actions?

 

Why might a company conduct a rights offering?

To buy back some of its shares.

To bring the price of shares down.

To raise money for company operations.

To allow investors to vote on a company action.

A rights offering occurs when a public company issues a contract to existing shareholders, giving them the right, but not the obligation, to purchase additional shares of the company at a predetermined price. 

 

Do You Know the Ins and Outs of Corporate Actions?

 

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The post Do You Know the Ins and Outs of Corporate Actions? appeared first on Stash Learn.

There are typically two parties in an M&A deal: The acquirer, or the company purchasing another company, and the target company, or the company being purchased and acquired. 

Generally speaking, if both companies involved in an M&A transaction are public, the target company’s stock will no longer be traded, and shareholders will get either cash, stock, or a combination of both in the acquirer’s company.

Basics of M&A deals

Every M&A deal varies in their terms, but the two main types are all cash and all stock deals. 

• In all cash deals, shareholders of the acquiree receive a set amount of cash per each share owned. 
• In all stock deals, shareholders of the acquiree get their shares converted to new shares of the acquirer. A great example of this is the T-Mobile and Sprint merger in early 2020 that converted all Sprint (S) shares to shares of T-Mobile (TMUS). (You can learn more about this merger here.)

There are also other variations of M&A deals, like cash & stock deals that are a mix of both of the above, and other, more complex deals where new spin-off companies are created with their own associated shares. 

About cost basis

A great example of a merger that involved a spin-off is the Raytheon (RTN) and United Technologies (UTX) merger in early 2020, which resulted in new stock for the merged company (RTX), as well as spinoff company stocks for the parts of United Technologies’ business lines that did not merge with Raytheon, like Carrier Corp (CARR) and Otis Worldwide (OTIS). (You can learn more about this merger here.)

In all M&As, your initial investment, known as the cost basis for your shares of the target company will be spread out to the new stock(s) received. In other words, your shares will convert but the value of your initial investment will stay the same, so you will not experience any additional gain or loss on the investment. It’s important to note that the average price you see on the newly converted shares may be much higher or lower than the current price of those shares on the market. This is because you are receiving these new shares at the same amount it cost you to purchase your original shares before the M&A event, not at their current stock price.

Some examples

For example*, let’s say you have an initial investment of $100 in company A for 10 shares total. This is your cost basis, or the initial cost to you to own those shares.

Company A then gets acquired by company B. The terms of the deal say each share of A converts to two shares of B. Your 10 shares of A will be removed from the platform, and you will instead see 20 shares of B in your portfolio.

The initial investment of those new 20 shares of company B will still be $100, the cost basis or initial investment of your position in company A. The app will show those shares having an average price of $5, as the $100 cost basis divided by the 20 shares of B you now own is $100/20 = $5 per share.

This can get confusing if shares of company B are currently trading at $4 and you see your average price is $5. This is because you receive the shares at the same initial investment or cost basis that you originally invested in A with, and not the current price of company B stock.

Here’s another example. It’s the same as before, except this time the terms of the deal say each share of A gets $1 in cash and 2 shares of B. In this case, the cash is first taken out from your initial investment/cost basis in A (which was $100 across 10 shares). The 10 shares you own grant you $1 each a part of the deal, for a total of $10. This $10 you receive is reduced from your $100 initial investment/cost basis in A.

The remaining $90 is then spread across your new shares in Company B. Your 10 shares of A convert to 20 shares of B, and the average price per share of B becomes $90/20= $4.50.

This same principle is applied to all deals. The sum of all your new shares, or cash and shares, will equal your original initial investment or cost basis before the M&A occurred.

The post Find Out What Happens to Stock with Mergers and Acquisitions appeared first on Stash Learn.

With that in mind, companies may conduct something called a rights offering. That’s when a public company issues a contract to existing shareholders, giving them the right, but not the obligation, to purchase additional shares of the company at a predetermined price. Rights offerings are another way for a company to raise money, by selling more shares.

Rights are a type of derivative

That price is set in a contract, which is valid until a specific date in the future, at which point the right expires. 

The value of a right is determined by the current price of the stock with which it is associated. Because of this relationship, rights are referred to as a type of derivative investment product, meaning its value is derived or determined by the value of another stock. Other types of derivatives include warrants and options. 

Here’s an example:*

ABC company’s stock trades at $10 per share. 

ABC then conducts a rights offering, which gives existing shareholders the right to purchase one additional share at a predetermined price for every share they own at the time of the offering.  In this example, the terms of the right allow an investor to purchase each additional ABC stock at a discounted price of $9.90, while the current market price of ABC stock is $10. 

If you own 10 shares of ABC, you will have the right to purchase 10 additional shares at that predetermined price.The value of the right can be said to be worth $0.10 since that is the difference between the discounted price in the right and the current market price per share.

Depending on the current market price of the underlying stock, it may or may not be favorable to exercise the right when received. An investor may choose to exercise the option at a later date in order to take advantage of an increase in stock price. 

Additionally, this right can be sold in the market at any point prior to the end date specified in the right. In some cases, it can be in an investor’s best interest to let the right expire, like when the right specifies a predetermined purchase price that is higher than the current stock price. In this scenario, if the investor wants to purchase additional shares, they could just buy shares in the market at a lower cost.

Stash and derivatives

At this time, Stash does not support derivative investment products of any kind, including rights, warrants, and options. Therefore if you as an investor are entitled to a right of any kind, the security will be sold by Stash at market value at the time of receipt, and you will receive the proceeds of that sale in the form of cash once the transaction settles. 

The post What is a Rights Offering? appeared first on Stash Learn.

Companies can conduct a reverse stock split in order to prevent the stock from falling below a point where it jeopardizes its ability to continue listing on an exchange, in which case it could be delisted. (Find out about delisting here.) Generally speaking, a reverse split might happen when a stock approaches, or falls below, $1 per share. 

Like a stock split, a reverse stock split always has something called a split factor, which is a ratio represented as X:1. Meaning for every X shares you have, you will instead own 1 share that is now worth X times more than it was before the split.

Stock splits and share price

The most important thing to remember is that while the share price will change, there is no impact on the market value of the company (or your holdings) as a result of a reverse stock split. The market value, or market cap, of a company is determined by multiplying the price per share by the number of shares outstanding. When a company goes through a reverse stock split, the number of shares decreases and the price per share increases in the same proportional amount.

Let’s take a look at an imaginary example for ABC company, whose current share price is $.50.*

ABC plans a 1:10 (1 for 10) reverse stock split, effective January 2 of a given year. This means investors’ existing shares will be divided by 10, as they will be getting one share for every 10 they previously owned. 

Let’s say an investor has 10 shares of ABC purchased at $0.50 each. The total value of the investment is worth $5 (10 x 0.5=5) before the split. After the split on January 2, the investor  would now own 1 share worth $5 per share instead.

Note: The total value of the investment is still $5 (1x 5=5).

Here are the changes the investor would see to their portfolio:

The investor now owns 1 share of ABC stock, but with an adjusted price per share of $5. This 1 share costs the same amount to the investor as when they originally purchased the stock, $5 in our example.

Your investment value does not change. It is similar to exchanging quarters into a dollar. 4 quarters still make up a dollar, or you can just hold one dollar bill.

What happens to fractional shares?

Special note: Most Stashers own fractional shares. In the case of a reverse stock split, the value of your shares would be divided by the same split factor. Let’s say you own 10.1 shares of ABC, worth $5.05 (10.1x 0.5=5.05). After the stock split, you’d own 1.01 shares at $5 per share, but the value of your investment is still the same $5.05 (1.01 x 5=5.05.)

A word about market cap

The most important thing to remember is that while the price per share will change as a result of a stock split, there will be no impact on the market value of the company, or your investment.

The market value, or market cap, of a company is determined by multiplying the price per share by the number of shares outstanding. It represents the total value of its equity in the market.

When a company goes through a reverse stock split, the number of shares decreases and the price per share increases by a proportional amount, leaving the market value the same.

The post What is a Reverse Stock Split? appeared first on Stash Learn.

Whether we like it or not, platforms like Twitter, Facebook and Instagram are instrumental in spreading ideas that inspire action. Because of this, who and what is censored, flagged, blocked and removed on these sites is of the utmost importance. Recently, Twitter flagged several of President Trump’s tweets for being false, and Trump retaliated by calling the labels censorship, and issuing an executive order that would attempt to hold Twitter responsible for his libel. 

Confused? Don’t be! At issue is a law from 1996, called Section 230 of the Communications Decency Act, which says: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

That essentially means an interactive computer service–such as Facebook, Twitter, WhatsApp, and Instagram— cannot be held responsible if users post libelous or derogatory material. (Good to know: Libel is a false claim or statement made to  hurt another person’s reputation. It is similar to something called defamation.)

But the law also stipulates that the sites would have “good faith” power to remove content they believe to be objectionable. “Without 230, the Internet we have today wouldn’t exist,” says Mark Grabowski, associate professor specializing in internet law and digital ethics at Adelphi University, based in New York.

Trump’s executive order essentially asks the Federal Communications Commission, the agency that regulates interstate and international communications,  to reexamine the law with an eye to changing it, making social media platforms more like publishers, and therefore open to libel suits and other legal actions.

Here’s a quick timeline of what’s been going on, and what the implications are for the future of Twitter and social media. 

July 26, 2018: On Twitter, President Trump accuses Twitter of “shadow banning, or  suppressing, the tweet reach of  prominent Republicans, and vows to look into it.  At issue, according to Trump, is whether Twitter and other social media companies discriminate against conservatives, by making their tweets and posts less visible. Social media companies have been adamant that their algorithms prevent that kind of blocking.

May 26, 2020: Twitter puts a warning label under two of President Trump’s tweets. The Tweets read: “there is NO WAY (ZERO!) that Mail-In Ballots will be anything less than substantially fraudulent,” and “The will be a Rigged Election.” 

The warning label says “Get the facts about mail-in ballots.” The label links to a Twitter statement, as well as news stories and statistics pointing to Trump’s claims as false. 

May 28, 2020: President Trump issues an executive order stating that if such a site goes beyond their “good faith” abilities to censor its content, they are no longer exempt from lawsuits. If this executive order were to pass, it could mean that any instance of libel on a site such as Twitter would be the legal responsibility of both the writer and the medium.  “This executive order would fundamentally shift the balance of power in such a way as to chill first amendment rights of social media companies,” says business attorney David Reischer, based in New York.

May 29, 2020: Twitter flags another Trump tweet, this time for glorifying violence, an act exercising the media giant’s right to flag or remove offensive materials in “good faith.”The flag says the Tweet will remain accessible for the public interest. The tweet reads: 

“These THUGS are dishonoring the memory of George Floyd, and I won’t let that happen. Just spoke to Governor Tim Walz and told him that the Military is with him all the way. Any difficulty and we will assume control but, when the looting starts, the shooting starts. Thank you!”

What’s Next: “Trump’s executive order to end Section 230 protections doesn’t have any immediate effect,” Grabowski says. “The Federal Communications Commission, which promulgates rules for the Telecommunications Act, must decide whether and how to implement Trump’s order in a way that’s compatible with the law. There is, perhaps, enough ambiguity and wiggle room in the law’s requirement that platforms act ‘in good faith’ that the FCC could make some changes to appease Trump.” 

But FCC Chairman Ajit Pai hasn’t landed on any changes. As of now, the FCC commissioners are debating. The debates will be followed by public hearings. And, Grabowski notes, any restrictive changes will likely then be challenged in court by the social media companies. Following that, if Congress can get a two thirds vote, they could veto any changes.  

And the Long Term?: The FCC and Congress have the power to amend Section 230, and according to legal experts, they just might. “I think it’s important to realize that Section 230 was enacted in 1996 to protect startups now these are some of the most valuable companies in the world,” says Todd A. Spodek, an attorney in New York. 

Grabowski says that Congress wants to make sure these tech giants stay in check, but Democrats and Republicans can’t agree on how. 

If changes to Section 230 prevent social media companies from flagging  threatening and offensive language and false claims, social media platforms could devolve into spreading more hate and lies than they already do, legal experts say. But if these changes give more authority to social media platforms, essentially turning them into publishers, the platforms could dictate more of the national and international conversation by promoting content that aligns with their interests. 

For now, the long-term future of censorship, libel, and who’s legally responsible for it on social media platforms, remains to be seen.

The post What Trump’s Twitter War Means for Social Media appeared first on Stash Learn.