What is Tracking Stock?

1136 reads · Last updated: December 5, 2024

A tracking stock is a special equity offering issued by a parent company that tracks the financial performance of a particular segment or division. Tracking stocks will trade in the open market separately from the parent company's stock.Tracking stocks allow larger companies to isolate the financial performance of a higher growth segment. In turn, tracking stocks give investors the ability to gain exposure to a specific aspect of a larger company's business (e.g., the mobile division within a large telecom provider).A common example of tracking stocks is those issued by technology companies to distinguish their cloud computing business from their traditional hardware business. Another example is multinational companies issuing tracking stocks so that investors can choose to invest in business operations in specific regions or markets.

Definition

Tracking stocks are a special type of equity issued by a parent company to track the financial performance of a specific division or business unit. They trade independently of the parent company's stock on the open market, allowing investors to focus on specific aspects of a large company's business.

Origin

The concept of tracking stocks originated in the 1990s when companies sought to provide more transparent financial performance for their different business divisions. By issuing tracking stocks, companies could attract investors interested in specific business areas without having to completely spin off the division.

Categories and Features

Tracking stocks are typically categorized into two types: those tracking specific business divisions and those tracking specific geographic regions. Their features include: 1. Providing direct investment opportunities in specific businesses; 2. May not enjoy the overall financial stability of the parent company; 3. Investors may have limited voting rights.

Case Studies

A typical case is Liberty Media's issuance of tracking stocks for its SiriusXM business, allowing investors to focus on SiriusXM's growth without being affected by Liberty Media's other businesses. Another example is AT&T issuing tracking stocks between its media and telecommunications businesses, enabling investors to choose to focus on one area.

Common Issues

Investors might encounter issues when investing in tracking stocks, such as: 1. The performance of tracking stocks may not align with the overall performance of the parent company; 2. Investors may lack influence over management decisions of the tracking stock; 3. The market liquidity of tracking stocks may be lower.

Suggested for You

Activity Ratios

An activity ratio is a type of financial metric that indicates how efficiently a company is leveraging the assets on its balance sheet, to generate revenues and cash. Commonly referred to as efficiency ratios, activity ratios help analysts gauge how a company handles inventory management, which is key to its operational fluidity and overall fiscal health.

Accounting Profit

Accounting Profit, also known as Financial Profit or Book Profit, is the net income of a business for a specific accounting period, calculated according to accounting standards. It is derived by subtracting total expenses from total revenues and is typically reported in financial statements, particularly the income statement (profit and loss statement). Accounting profit includes all realized revenues and incurred expenses but excludes unrealized gains or potential losses. It reflects the financial performance and operational results of a business and is a crucial indicator for assessing profitability. Accounting profit differs from economic profit, which considers opportunity costs and implicit costs, whereas accounting profit is based solely on actual transactions recorded.

Accounting Method

An accounting method refers to the rules a company follows in reporting revenues and expenses. The two primary methods of accounting are accrual accounting (generally used by companies) and cash accounting (generally used by individuals).Cash accounting reports revenues and expenses as they are received and paid through cash inflows and outflows; accrual accounting reports them as they are earned and incurred through sales and purchases on credit and by using accounts receivable & accounts payable. Generally accepted accounting principles (GAAP) requires accrual accounting.

Accounting Ratio

An Accounting Ratio, also known as a Financial Ratio, is a ratio derived from data in financial statements used to analyze and assess a company's financial condition, operational efficiency, and profitability. Common accounting ratios include the current ratio, quick ratio, debt-to-equity ratio, gross profit margin, net profit margin, and return on assets. These ratios help investors, management, and other stakeholders understand the financial health and performance of a business. For example, the current ratio measures a company's short-term liquidity, while the net profit margin indicates its profitability. Accounting ratios are essential tools in financial analysis, aiding in making more informed investment and management decisions.

Back-End Ratio

The Back-End Ratio refers to the percentage of a person's monthly gross income that goes towards paying all of their debts. This ratio includes housing expenses (such as mortgage, insurance, and taxes) as well as other debts (such as credit cards, car loans, student loans, etc.). The Back-End Ratio is a key metric used by lenders to assess a borrower's ability to repay a loan. Generally, a lower Back-End Ratio indicates a stronger ability to manage debt, making lenders more willing to extend credit. Typically, lenders prefer a Back-End Ratio that does not exceed 36% to 43%, depending on the type of loan and the lender's policies.

Headline Earnings

Headline earnings refer to a method of reporting corporate earningsbased entirely on operational, trading, and capital investment activities achieved during the previous period. Excluded from the headline earnings figure are profits or losses associated with the sale or termination of discontinued operations, fixed assets or related businesses, or from any permanent devaluation or write-off of their values.