Nothing's worse than not knowing what's going on with your investments. Even though stock investors have to deal with the threat of huge price swings all the time, some particularly tricky events can radically change share prices for reasons that may be extremely confusing -- and if you don't understand them when they happen, then they can leave you feeling like a fool.
The ins and outs of corporate actions
Most of the time, when you see a stock make a big move, you can find some sort of news item that connects the move to some fundamental aspect of the underlying business. A takeover bid can vault shares of the target company into the stratosphere in no time flat, while a bad earnings report or an unforeseen catastrophe can punish a stock's price.
But stock prices can change for other reasons, many of which are largely artificial and therefore should theoretically have little or no impact on a company. Yet because these events happen all the time, you can't afford to be in the dark about them. Here are some of the most common corporate moves that can dramatically change your stock's price in ways that can be really misleading if you're not on top of them.
Doing splits
From time to time, companies decide to adjust the value of their shares by doing stock splits. When a company does a regular stock split, you'll see the price of shares go down. For instance, with a 2-for-1 split, you'll own twice as many shares after the split, but each post-split share will represent only half the fractional interest in the overall company as the pre-split shares, so they should be worth about half as much.
But in the aftermath of the market meltdown, shareholders are increasingly seeing reverse splits. Reverse splits have the opposite effect; they push share prices up but leave you with fewer shares than you owned previously.
If you don't stay up-to-date on your portfolio, you might just see the stock price zoom upward after a reverse split without realizing that you now own fewer shares. With Citigroup (NYSE: C ) having announced a 1-for-10 reverse split, shares could soon trade above $40 versus their current $4 -- but it's not a windfall for you. Similarly, a recent 1-for-2 reverse split at United States Natural Gas (NYSE: UNG ) pushed share prices back above $10, perhaps masking for some naive investors the fact that shares have lost more than 60% of their value in the past two years.
Big dividends
It's great to get dividends, but most of the time, they're relatively small. Occasionally, though, a company makes a huge distribution -- and it often has an impact on the share price.
For instance, consider these recent episodes:
- During the month of July last year, shares of Weyerhaeuser (NYSE: WY ) fell from $35.20 to $16.22. But if you think shareholders were unhappy, think again -- because they actually received a dividend payment worth more than $26, turning what appeared to be a big loss into a handsome gain.
- In September, Diamond Hill (Nasdaq: DHIL ) announced it would pay a $13 special dividend from its own cash. Shares jumped $11 on the day of the announcement and rose in the following months until the day the dividend was actually paid -- when shares predictably fell just about $13.
- Sometimes, even pros get confused about special dividends. With both optionsXpress and China Digital (NYSE: STV ) last year, confusion about special rules governing the date on which investors must own shares in order to receive the dividend led to some strange price action.
The key is staying aware of dividends and knowing the important dates that define who'll get the payments. There's often a long lag between when a dividend becomes official and when it hits your brokerage account, so don't be surprised if your account balance drops for a while.
Spinoffs
Finally, companies sometimes spin off parts of their business into a new, separate stock. Like a stock split, the sum of the value of the new pieces should be close to the value of your old shares -- which means that after the spinoff, the original company shares will be worth less.
For instance, when Altria (NYSE: MO ) spun off shares of Philip Morris International (NYSE: PM ) back in March 2008, Altria shares fell from $73 to $22. But the Philip Morris shares that Altria investors received were worth around $50, so overall, the value stayed roughly the same.
Don't be a fool
Even expert investors fall prey to the prank-like antics of corporate actions from time to time. But once you get used to them, you won't panic the way you probably will the first time you see it happen to you.
Don't get fooled again. Learn all the basics of investing -- take a look at our 13 Steps to Investing Foolishly.
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