Understanding Tracking Stocks Including Its Benefits and Risks
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One of the best ways for investors to take on risky markets and make profits is by seeking thorough information. There’s a key term – Tracking stock – which adds to the arsenal of knowledge for an investor.
Tracking stocks as a term requires an expert to help make everything simple for all cohorts of investors here – novice and experts. Therefore, as part of our commitments to dig deep into every topic we lay our hands on – we’ve reached out to Ezekiel Chew, seeking his expert opinions regarding – tracking stock.
As an expert, Ezekiel brings in more than two decades of trading in the financial markets. Readers should expect to know exactly what tracking stock is. Reading on, He will share a detailed process of how it is undertaken. And for the benefit of readers, there’ll be a few practical examples.
Towards the end of this post, readers will get to see the benefits that come with tracking stocks. Plus, the risks of tracking stocks.
What is a Tracking Stock?
In the simple definition, a tracking stock refers to a particular stock that a company issues with the purpose of representing a certain division. The tracking stock may as well represent a segment or sector of the entire business or firm. In other circles, tracking stocks appear in two other names, yet they refer to the same thing. One is targeted stock, and the second is letter stock.
According to experts, tracking stocks came as a form of financial engineering to iron out valuation complexities with stocks. The valuation by sectors and in line with their performance forms a more reasonable basis as opposed to the holistic revaluations. It creates an avenue to reduce agency problems.
With a tracking stock, investors get a chance or an opportunity to evaluate the target sectors of the entire business. Essentially, tracking stocks allow valuation based on purely different terms – which are inclusive of the PE or Price-earnings ratios.
Technically, the investors are able to view the sectors from a position of neutrality. That’s because the directors retain control over the entire firm. In better words, the investors have the room to make speculations.
While the arrangement with tracking stocks exists, management’s ability to retain ownership ensures that no shareholders have the power to create any separate legal entities. Therefore, the parent company remains protected. Of course, with any separate legal entity, authorities shall require a separate board plus a management team.
In retrospect, tracking of stocks gained traction back in the 1990s. One key industry that set the trigger with the policy of issuing tracking stocks was the technology sector. Ideally, back in the early 1990s, tech was just like a bubble – that was so promising to be true.
Therefore, many tech corporations then spotted the concept and went ahead to form divisions that would burst the performance and profits consistently. So tracking stocks came up as a solution to help directors and stakeholders with both valuation and performance management.
How to Track Stocks
Investors have very many arrays of ways to help them track stocks or monitor them. More so when it comes to the deployment of technological solutions pursuing tracking of stocks. But for the purposes of this post, we’ll highlight four generic models that you can adopt and track stocks successfully.
Come Up with a Portfolio
Many brokers can currently help you with online accounts to create and manage portfolios. Along with that, many portals also have applications to help account holders use trackers to manage their holdings. Over and above working delayed quotes, investors can track their total worth at a glance. Some trackers give key leads regarding the information of the company. In a nutshell, the information shows the past price movements and current news. Plus statutory filings with state authorities like the Securities and Exchange Commission.
Dig into the History of a Stock for financial planning
For prospective investors who want to be in it for the longest, the daily dose of monitoring stocks may not apply. Daily is too much, but longer timespans – periodic works best for them.
In fact, it creates enough information worth enough to digest periodically, and they’ll just be alright with the updates as regards their investments.
However, it’s best for the prospective investor to put in efforts to study the asset far deep into the historical performance as far as feasible. The next stage is to now figure out the current performance in light of the historical details. And of course, figure out the same within the performance of the market overall.
Holistic Analysis of Available Sources
For a willing investor, so much information is always at their disposal. Most company portals have all that is needed.
And it includes performance records and reports, relevant news, planned events, the total valuation of capital, IPOs or initial public offerings, statements of income, and statements of capital or balance sheets, among others. Of course, state authorities require to retrieve information on annual reports filed for all publicly listed firms.
Seeking the Opinions of Experts on the financial performance of a Corporation
On a specific aspect, willing investors have enough information at their disposal. Too much of it is already out there. However, the same information could be too much for some investors to search and analyze meaningfully.
One challenge could be the time to sit and do the analysis. Plus, the reliability of the information would also diversely affect the decisions regarding credible investments. And the best remedy under the circumstance would be bringing on board a professional to help with the analysis.
To add value to this model, listed firms always share forecasts of earnings plus publish the actuals. Also, they share the dividends -proposals plus actuals. There are other finance-oriented sites that can help with very credible stuff for investment analysis. One place to check on is Yahoo Finance. You’ll find information on taxes, assets, and other securities
Being Purposefully Active regarding Investments in a Parent company
Here, means being active, joining in as an investor, and playing what your duty is as one. All investors have the right to raise questions and tender complaints with the sitting directors.
As opposed to sitting in the cold, raise the necessary noises, and confide in managers via the relevant avenues provided. Of course, to complete the investment loop, get the information you’re seeking and pique the reports with utmost seriousness. Plus, share helpful opinions – after all, you are the investor – the owner of the company.
Tracking Stock- an Example of tracking stock structure
One example of a practical tracking stock appeared back in 1999. Walt Disney’s parent Company issues tracking stock Go.com. Primarily, Go.com was an internet segment as a high-growth division. Go.com’s tracking stock had -GO- as its ticker symbol.
And come January 2001, Disney- the parent company, had no options. They had to close Go.com and send employees home in a layoff spree. The main trigger was the bursting of the tech bubble.
Benefits and Risks for Company’s Tracking Stock
As with everything, there are pros and cons, and so applies to tracking stocks.
Firstly, a tracking stock of a specific division can tip off the directors to spot and place more efforts within a potential sector via financial performance. Overall, the inflows are a plus in increasing both the outstanding shares plus the profitability. And all these go to an increased valuation of the enterprise (common stock) and Price-earnings ratios.
By extension, tracking stocks only help to increments in the shareholder’s wealth -or common stock. Over time, other than selling the increased share for capital gains, they’ve opportunities to take on other investments.
Internally, the board and management members have two probable alleys to explore with intergroup interest of the issuing corporation. Exploration involves making an acquisition with an aim to expand the business. Secondly, there’s an opportunity to justify more focus on a profitable operations segment/business- but only if tracking stocks proves worth it.
On the flip side, tracking stocks brings in a relative portion of drawbacks with it.
One drawback with tracking stocks is the disadvantage that shareholders of the segment stand to lose money when a segment scores good results, yet the parent company fails.
In the second instance of a drawback, tracking stocks comes either with a limitation or no right to vote at all. It means the shareholders have limited decision-making powers or voting rights – if any.
Thirdly, tracking stocks sees the mismanagements of the parent company spill over into the performance of the segment under tracking. In case the parent management runs a firm into bankruptcy, the obligations to settle creditors extend claims into the segment. And that matters not whether the segment overperforms.
Tracking Stocks Benefits and Risks for Investors
Tracking stocks brings to investors light what segments they should focus on. Therefore, they can specialize. Large firms fail at following up on small sectors from the heap of financial data of an entire company. So tracking stocks only allows investors to put their interests with what’s working.
Next, tracking stocks allows investors to invest according to the segments as per their preferences for risk tolerance limits, however, with caution of the performance of a parent firm.
And on the downside – investors are a segment with no voting rights. So no influence can take place from a segment to the parent corporation.
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Conclusion: Tracking Stocks
Tracking stocks are issued by a parent firm to monitor the performance of a division or a segment. This is a move that comes with benefits and drawbacks as well. One benefit is that management is able to see a highlight of a well-performing segment of one group.
Conversely, a drawback of the tracking stock arises where mismanagements of the parent firms spill over to reduce the performance of a segment with a tracking stock.
Finally, for key takeaways, tracking stock is taking a risk on parent management. The credit obligations equally weigh in on investors under the tracking stock.
Tracking Stocks FAQs
What is the best way to track stocks?
The best way to track stocks is by following the performance of an individual stock over a long period of time.
Many sites and apps are able to bring you updates in a timely fashion to help with investment decisions.
What is the best app for tracking stocks?
The best app for tracking stocks brings out your target details in summary. Therefore, choose an app that gets what you require: snapshots or stock ratings.
