Tracking Stock
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. Unlike the parent company's common stock, tracking stocks trade independently on the open market, allowing investors to focus on specific aspects of a large company's business.
Origin: The concept of tracking stocks emerged in the 1990s to help large corporations better evaluate and showcase the financial performance of their different business units. By issuing tracking stocks, companies can attract investors interested in specific business units while maintaining overall control of the company.
Categories and Characteristics: Tracking stocks can be categorized based on different business units or geographic regions. For example, a multinational company might issue tracking stocks for its European operations, or a tech company might issue tracking stocks for its cloud computing business. Key characteristics of tracking stocks include:
- Independent Trading: Tracking stocks trade independently of the parent company's stock on the market.
- Focus: Investors can focus on the financial performance of specific business units.
- Risk Diversification: Through tracking stocks, investors can diversify their investment risk by focusing on business units with higher growth potential.
Specific Cases:
- Case 1: A large tech company issues tracking stocks to distinguish its cloud computing business from its traditional hardware business. Investors can choose to invest in the rapidly growing cloud computing business without taking on the risks associated with the traditional hardware business.
- Case 2: A multinational company issues tracking stocks focused on its Asian market operations. By purchasing these tracking stocks, investors can directly invest in the company's Asian business without considering the performance of other regions.
Common Questions:
- How do tracking stocks differ from the parent company's stock? Tracking stocks focus on the financial performance of specific business units, while the parent company's stock represents the financial performance of the entire company.
- What are the risks of tracking stocks? The risks of tracking stocks primarily stem from the performance of the specific business unit they track. If the business unit performs poorly, the value of the tracking stock may decline.
