What’s tracking stock?

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Stock tracking is a form of security issued by a business for a particular purpose. Essentially, inventory tracking functions as a way to assess the performance of a particular line of business or a subsidiary of a larger company. Because trailing stock pertains to a specific component of the overall business, it does not affect issued stock for the overall business.

Stock tracking is a different approach than what is known as a stock spin-off. With a spin-off, shares are issued in an entity that is set up with a different operating structure than the parent company. With a derivative arrangement, it is usually necessary to make some fundamental changes to the basic structure of the business. The issuance of follow-on shares does not require such changes.

The use of tracking stock is common in many different industries. Entertainment companies made use of the stock tracking model at the start of the dot-com boom in the 1990s to launch online divisions that still operated under the umbrella of the parent company. Telecom companies also made use of the tracking inventory model during the diversification of the 1980s and 1990s, which led many telecoms to offer new lines of communication services that were different from their core business. While the trend has leveled off somewhat in recent years, stock tracking is still a viable way of doing business.

For the investor, tracking stocks can be a great way to earn dividends. Depending on current market opportunities, the dividend earned per share can be quite substantial. However, stock tracking is not immune to the usual risk potential that comes with any type of investment. As with any investment activity, investors should research the opportunity thoroughly before purchasing shares of trading stocks. This includes considering the historical performance of the parent company’s stock, as well as evaluating the potential of the trading stock itself.

Smart Asset.

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