Have you ever heard the term ‘tracking stocks?’ If you notice, several public companies usually spin-off tracking stocks. Sometimes, stock investors find themselves owning shares of a business that they do not quite understand.
Are these the shares that have traded on the company this long or are they belong to a new company? The answer can be a combination of those.
What are Tracking Stocks?
Basically, a tracking stock is a type of stock issued by a particular company representing a segment of its business. These stocks allow investors to value a particular aspect from a bigger business on a different price to earnings ratio and also different terms.
With tracking stock investors can speculate making a profit out of a specific department of a company. At the same time, the management can still hold control over it without having to create a separate entity or sell the ownership.
Around the 90s, tracking stock gained its popularity. It gives a significant result for those ambitious management teams which tried to increase their valuation level. Even the most stable old blue-chip stocks turned into craze during that time.
The Example of Tracking Stocks
During that 90s, Sprint was one of the most attractive telecommunication companies in the U.S. Its business was highly profitable and paid a large dividend. Then, the company opened a new division specialized in cell phones.
The management was sure that cell phone will be extremely popular in the future, it will win over landline. Several years later, with the invention of the internet, cellular companies were valued at an unimaginably higher amount.
During that time, Sprint decided to divide its common stock into two different tracking stock. Those two stocks trading in the different ticker symbols. The shareholders, later get one share from the cell phone department for every two shares on its traditional business.
After some time, the demand for the cell phone department shares was incredibly high. That successfully made its employees became millionaires.
Nowadays, we still see examples of tracking stocks. One the example is Liberty Media which owns Sirius XM Holdings. The owner has spun off the business into three different tracking stocks, they are LSXMA, LSXMB, and LSXMK.