Tracking Stock

What Is a Tracking Stock?

A tracking stock is a special equity offering issued by a parent company that tracks the financial performance of a specific segment or division. Tracking stocks will trade in the open market separately from the parent company's stock.

Tracking stocks permit larger companies to isolate the financial performance of a higher growth segment. Thus, tracking stocks enable investors to gain exposure to a specific part of a larger company's business (e.g., the mobile division inside a large telecom provider).

Figuring out Tracking Stocks

At the point when a parent company issues a tracking stock, all revenue and expenses of the applicable division are separated from the parent company's financial statements. The long-term performance of the tracking stock is tied to the financials of the division or segment it follows, not the parent company.

On the off chance that the division really does well financially, the tracking stock will probably see the value in even assuming the parent company is performing poorly. On the other hand, assuming the division droops financially, the tracking stock will probably fall even on the off chance that the parent company is getting along admirably.

Large companies could issue tracking stocks to separate a segment that doesn't exactly fit with the core business. A model would be a large manufacturing company with a small software development division.

Companies likewise issue tracking stocks to isolate a high-growth division from the larger more slow growth parent. Be that as it may, the parent company and its shareholders hold control of the division's operations.

Tracking stocks are registered in much the same way to common stocks per the regulations enforced by the U.S. Securities and Exchange Commission (SEC). The issuance and reporting are basically equivalent to they are for any new common shares. Companies incorporate a separate section for the tracking stock and the financials of the underlying division in their financial reports.

Tracking stocks were all the more much of the time utilized in the late 1990s technology boom than they are presently, albeit a few companies actually issue them today.

Tracking Stocks Benefits and Risks for Investors

Tracking stocks permit investors the opportunity to invest in a specific portion of a lot larger business. The appreciation capability of deeply grounded conglomerates is in many cases limited due to them having different divisions across different business lines. Tracking stocks can give investors access to just the most encouraging parts of a company.

Tracking stocks additionally permit investors to partake in the business segments that best accommodated their own risk tolerance. All things considered, investors should be aware of the risks implied in buying a tracking stock when the parent company is battling or not deep rooted.

The parent company and its shareholders don't surrender control of the tracking segment's operations. Investors of tracking shares commonly have limited or no voting rights and in the event of corporate bankruptcy at the parent company, creditors would have a claim on the tracking segment's assets (even on the off chance that the segment was getting along admirably).

Tracking Stocks Benefits and Risks for Companies

Companies fund-raise through the issuance of tracking stocks. The proceeds can then be utilized to pay down debt, fund other growth projects, or invest further in the tracking division.

Companies can measure investor interest in specific segments of the business through the associated activity of each tracking stock. For instance, a large-scale telecom monster might decide to utilize tracking stocks to separate its remote segment and its landline services. Investor interest in every division can be estimated in view of the performance of every one of the tracking stocks.

Tracking stocks likewise take out the requirement for management to make a separate business or legal entity for the followed segment. In a spinoff situation, for instance, the separated segment would require its own board of directors and management team.

On the flip side, companies that issue tracking stocks may be parsing out the best parts of their company. Assuming the parent company fails to meet expectations financially, the high-growth segment associated with the tracking stock will not have the option to assist with offsetting that poor performance.

In 1999, the Walt Disney Company issued a tracking stock for its internet holdings division, Go.com. Go.com's sites included ESPN.com, ABCNews.com, Disney Online, and Disney's Daily Blast. The tracking stock traded under the ticker symbol "GO."

In January 2001, just as the tech bubble was popping, Disney was forced to close Go.com, lay off many employees, and retire the tracking stock permanently.

Features

• A tracking stock is a specialized equity security issued by a parent company to "track" a certain segment or division of the corporation.
• The tracking stock's performance will largely be tied to the outcome of the division it tracks, not the overall company.
• A company's tracking stock will trade in the open market independent of the parent stock.
• Companies issue tracking shares to raise capital and to offer investors the chance to gain exposure to one specific division.
• Tracking stocks carry a similar risk as some other stock and regularly do exclude shareholder voting rights.