tracking stock

Best defined with an example. Suppose Company A purchases a business from Company B and pays B with 1 million shares of A's stock. The agreement provides that B cannot sell the 1 million shares for 60 days, and also prohibits B from hedging by purchasing put options on A's shares or short-selling A's shares. B is worried that the market may fall in the next 60 days. B could hedge by purchasing put options or selling the futures on the S&P 500. However, it is possible that A's business is much more cyclical than the S&P 500. One solution to this problem is to find a tracking stock. This is a stock that has high correlation with A. Let us call it Company C. The solution is to sell short or buy protective put options ( protective put buying strategy) on this tracking stock C. This protects B from fluctuations in the price of A's stock over the next 60 days. Because the degree of the protection is related to the correlation of A and C's stock, it is extremely unlikely that the protection is perfect. Multidivisional firms have used a form of restructuring called tracking stock since 1984 to segment the performance of a particular division — similar to a spin-off or carve-out, except that the parent firm does not relinquish control of the tracked division. Previously, this was known as alphabet stock, but the technically correct name is tracking stock ( e.g., EDS traded for years as a tracking stock of GM). This is a way to reward managers for good divisional performance with an equity that is tied to their division-rather than potentially penalizing them compensation for bad performance in a division they have no control over. Bloomberg Financial Dictionary

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tracking stock UK US noun [C or U] FINANCE, STOCK MARKET
a company's shares that pay out dividends based on how much profit a particular part of the whole company makes, rather than its main shares: »

The company issued a tracking stock to highlight the value of a part of the business that had been overlooked.


Financial and business terms. 2012.

Look at other dictionaries:

  • Tracking Stock — Tracking Stocks (Geschäftsbereichsaktien, auch Targeted Stock, Mirror Stock, Letter Stock und Alphabet Stock genannt) sind Aktien, die sich nur auf einen bestimmten Geschäftsbereich eines Unternehmens beziehen. Die Inhaber dieser meist… …   Deutsch Wikipedia

  • Tracking-Stock — Tracking Stocks (Geschäftsbereichsaktien) sind Aktien, die sich nur auf einen bestimmten Geschäftsbereich eines Unternehmens beziehen. Die Inhaber dieser meist börsennotierten Aktien haben die gleichen Rechte wie die Inhaber von anderen Aktien,… …   Deutsch Wikipedia

  • Tracking stock — Tracking Stocks (Geschäftsbereichsaktien) sind Aktien, die sich nur auf einen bestimmten Geschäftsbereich eines Unternehmens beziehen. Die Inhaber dieser meist börsennotierten Aktien haben die gleichen Rechte wie die Inhaber von anderen Aktien,… …   Deutsch Wikipedia

  • Tracking stock — A tracking stock is a security issued by a parent company to track the results of one of its subsidiaries or lines of business. The financial results of the subsidiary or line of business are attributed to the tracking stock. Often, the reason… …   Wikipedia

  • Tracking Stock — 1. Common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company. Also known as designer stock . 2. A type of security specifically designed… …   Investment dictionary

  • tracking stock — noun Date: 1989 a stock the value of which is linked to the performance of a company division but which does not confer ownership in the company or the division …   New Collegiate Dictionary

  • tracking stock — Fin a stock whose dividends are tied to the performance of a subsidiary of the corporation that owns it …   The ultimate business dictionary

  • Stock dilution — is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible… …   Wikipedia

  • Stock — For capital stock in the sense of the fixed input of a production function, see Physical capital. For other uses, see Stock (disambiguation). Financial markets Public market Exchange Securities …   Wikipedia

  • stock — physical items ( inventory) that a business uses in its production process or has for sale in the ordinary course of doing business. Glossary of Business Terms Ownership of a corporation indicated by shares, which represent a piece of the… …   Financial and business terms

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