Entering Corporate Actions and Spin-Offs
Corporate actions are special events that affect a company’s stock. An example of a corporate action is a corporate spin-off, in which the parent company splits off part of itself (such as one of its divisions) into a separate business.
Corporate actions have repercussions on the company’s stock. In the case of a corporate spin-off, the change is typically to the cost basis of the stock. Other types of corporate actions can affect the number of shares.
To handle these situations, StockMarketEye provides the Corporate Action transaction type. This transaction type allows you to modify the cost basis of your holdings and/or change the number of shares you own. It is similar to a stock split, but has the extra dimension of being able to change the cost basis.
Although it is possible to record a stock split using a Corporate Action transaction, we recommend that actual stock splits (2-for-1, 1-for-7 reverse split, etc.) be recorded with a stock split transaction, rather than as a corporate action. See the documentation on recording a stock split for more details.
How A Corporate Spin-Off Works
In a typical corporate spin-off, the company splits itself into 2 separate entities - the original parent company and the newly spun-off company. Shares in the newly spun-off company are given to owners of the parent company’s stock. If you owned shares of the parent company at the time of the spin-off, you would end up owning shares of both companies after the spin-off.
The total value of your investment in the parent company before the spin-off is the same as the value of your investment in both the parent company and the spun-off company after the spin-off. This is because, even though the number of shares you own in the parent company does not change, the cost basis of those shares changes by the value of the spun-off company.
For example, let’s say you owned 100 shares of Company A. On Monday, Company A is trading at $10 per share so your investment in Company A is worth $1000.
On Tuesday, Company A spins-off one of its divisions into Company B. Company A says that for each 10 shares of Company A that you own, you will be given 3 shares in Company B. It also says that Company B made up 30% of its total value so the value of Company A’s shares will be reduced by 30%.
Due to the 30% reduction in Company A’s value, their shares on Tuesday trade at $7 per share. Your investment in Company A is now worth $700. Company B’s shares on Tuesday trade at $10 per share. You received 30 shares in Company B, which are now worth $300. The total value of your investment is still $1000, but is now divided between Company A’s and Company B’s shares.
Recording a Corporate Action
Follow the steps below to record a corporate spin-off or other corporate action in StockMarketEye.
Select the stock in your portfolio that is performing the corporate action. Then click on the "Other" button in the toolbar and choose, Record Corporate Action...
- In the Corporate Action Details window, enter the percentage change in cost basis in the “Cost Basis Change (%)” field. From the example above with Company A, you would enter 30 here.
a. NOTE: Leaving the "Cost Basis Change (%)" field at 100 means the current purchase price per share will not be altered by the transaction. However, if you set the "Shares Change (%)" field, the cost basis of your holding will implicitly be changed because the number of shares has changed. In this scenario, you should enter a stock split transaction instead.
- If there was also a change in the number of shares, enter that in the “Shares Change (%)” field. If there was no change in the number of shares, enter 100 in this field.
- Be sure to set the proper date of the action in the “Date” field.
- Click ‘OK’ to record and apply the corporate action to your holding.
Recording a Spin-Off
In addition to the Corporate Action transaction recorded above, for a spin-off, you'll also want to record a "Shares In" transaction to account for the newly received shares.
- The shares received for the spun-off company (Company B in the example above) should be recorded as a shares in transaction. You can do this via the toolbar button, Options -> Buy Stock....
- In the Purchase Details window, change the “Type” option to “Shares In”. Be sure to set the “Cash Balance” to “Do not update” as this is required to properly calculate performance of the spun-off shares.
- Then enter the “Symbol”, “Quantity” and “Price” fields according to the new shares you are receiving. You will need to consult with either your brokerage or with the parent company for the exact details of the shares your receive. You can leave the “Commissions” and “Fees” fields empty.
- Be sure to set the “Date” field to be the same date as you recorded for the Corporate Action transaction.
- Click ‘OK’ to add the shares of the new company to your portfolio.
Modifying A Corporate Action Transaction
You can modify a corporate action transaction just as you would any other transaction in StockMarketEye. Simply double-click on the transaction in the Transactions report to open the Details window.
After you have modified the transaction, you may need to re-build your portfolio (Prices view) from the transactions. This is because undoing and re-doing the effects a corporate action can, depending on the changed values, cause discrepancies between the Prices view and the Transactions.
To rebuild the Prices view from the Transactions, follow the steps in the section Rebuild Your Portfolio From Its Transactions.