What is a Tracking Stock?
A tracking stock is a security that is issued to track the performance of a wholly-owned subsidiary.
How Does a Tracking Stock Work?
A large, diversified company may issue a tracking stock based on one of its wholly-owned subsidiaries. The company may do this because it believes that the subsidiary's performance will be very different (much better) than the parent company. The use of tracking stocks was a relatively common strategy employed by companies during the technology growth boom of the 1990s. Parent companies would launch subsidiaries based on new products and services, such as Internet service companies. Because these "spin-offs" were stripped of the diseconomies of scale and cost centers within the parent company's operations, their stock performance was expected to soar.
Examples of tracking stocks were The Walt Disney Company's wholly-owned subsidiary "go.com." Other examples include regional branches of national cell phone operators. Eventually, most tracking stocks are absorbed by the parent company as the operations and the tracking stock's performance come into line with the parent's stock.
While the tracking stock is based on the subsidiary's financial performance, it is legally and financially bound to the parent company. For accounting purposes, while the financial performance of the tracking stock company is reported separately, it is ultimately consolidated within the parent company's financial statements
Why Does a Tracking Stock Matter?
A tracking stock pays a dividend on the basis of the shares issued under the tracking stock itself and not on the basis of the parent company. However, holders of tracking stock have equity in the parent company's shares.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
You’ve probably heard of a checking and savings account before, and you might even have your own accounts. But which is the best place to keep your money? Below we’ll compare the features of...Read More →
High unemployment is affecting almost everyone in one way or another. Recent college graduates...Read More →
Dividend-paying stocks have been an ...Read More →