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General Investing => Stocks And Index Funds => Topic started by: quantakiran on November 13, 2018, 08:54:15 AM

Title: Capital reduction (small words neededed)
Post by: quantakiran on November 13, 2018, 08:54:15 AM
Hi guys

So last year I purchased shares in a property management company. It was ranked neutral and they give dividends. They have now done a "capital reduction". I've received some money and my broker said that the number of my shares remains unchanged. However the share price decreased.

Am I at risk of losing my shares?

Why on earth would a company do this and devalue their shares?

I never knew there was so much more to shares than simply buying, holding and selling. And I'm having the worst luck.

Last year, this time, another share I purchased decided to reduce the number of shares and increase share price. Well, needless to say I only have a 10th of the number of shares  the share price has dropped to almost the level I purchased it at, so I am definitely in the hole :( Admittedly this is the first share I bought and it's definitely one of the FFF (friends, family and fools).

Any help will be appreciated.
Title: Re: Capital reduction (small words neededed)
Post by: polama on November 13, 2018, 09:54:51 AM
Quote from: quantakiran on November 13, 2018, 08:54:15 AM
... I've received some money and my broker said that the number of my shares remains unchanged. However the share price decreased.

Sounds like a "special dividend". Dividends are usually a quarterly/annual thing that shareholders expect to keep getting. A special dividend is a one time thing, usually a larger payout.

If a company pays a $1/share dividend, it should go down roughly $1 afterwards. The company has less money, so it's less valuable. It may go down more or less depending on if the dividend seems to convey good news or bad news about the company.

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Am I at risk of losing my shares?

Only in the sense that you always are. Hopefully somewhere on the investment website they lay out why they're doing the capital reduction. There's a reason they decided on this action, and that reason could portend good, bad or neutral things. If it's a bad sign (maybe they're trying to pull out any money they can before going into bankruptcy or something) then yes. Otherwise, no more than before.


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Why on earth would a company do this and devalue their shares?

The most straightforward reason would be that they had more cash then they could use. Maybe they couldn't grow the staff fast enough to manage that much more property. Or maybe the opportunities in the market didn't look good right now. Or maybe they think the industry is going to go down, so it's a bad time for investment. Whatever the reason, rather than just sit on the money they gave it back to you guys. If they had just sat on it, the market would have seen that they weren't being productive with their cash, so the stock would go down anyways.

Or possibly the board of directors wanted new yachts or something. Or they were trying to scare off a shortseller. Your best bet is to just email them and ask.

Put another way, if you give an investor $1000, and reduce his investment worth by $800, he should be happy. So it's not a big deal that a company is devaluing its shares if it's doing so by giving the difference to the investors.

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Last year, this time, another share I purchased decided to reduce the number of shares and increase share price. Well, needless to say I only have a 10th of the number of shares  the share price has dropped to almost the level I purchased it at, so I am definitely in the hole :(

That's a "reverse split". In your case you got 1/10th the number of shares, but each one was worth 10x more, so no actual impact on you.

But in practice, companies have reverse splits because their stock price is too low (either it's too granular, so a 1 cent change is too big a shift; or the stock markets have minimum share price requirements they have to meet). So although the mechanic of splitting a stock is neutral, it's something that usually happens "on the way down". If a company is headed towards failure, it might keep splitting its stock over and over as its market cap (it's total value) keeps approaching $0.

So basically, in both cases "reverse split" and "special dividend", the company is taking an action and its the reason for the action and the price trends that matter (not so much the action itself).
Title: Re: Capital reduction (small words neededed)
Post by: quantakiran on December 06, 2018, 09:43:08 PM
It's not them. It's me. :'( So this share has consolidated and changed name. So for every 20 shares I will get 1. This is the second share I own that has done this. I should have just put the money in a fixed deposit. :-\