Who Are These Activist Investors?
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Activist investors can help increase the value of a company, but it’s important to look at the other implications involved.
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In investing and stock trading, you’d have heard of activist investors. It sounds like a fancy name, and there is a great deal of influence involved here. Activist Investors Can Change the Course of a Company Activist investors are individuals or groups that buy the shares of a public company in large numbers so as to influence the company to bring about a major change. This usually happens when there is mismanagement in the company. Sometimes, these investors feel the company can be run a lot more profitably if it becomes a private company. There could be too much spending going on, or some other issue which, activist investors believe, can be fixed if they get involved. Buying significant number of shares of the company is how to do it, and they feel that can help increase the value of the company. The role of the activist investor is usually played by really rich individuals, hedge funds and private equity firms. If a company files the SEC Form 13D, it is an indication that it has become an activist investing target. SEC Form 13D needs to be filed in the event of an investor buying 5% of the company’s shares or more. On the face of it, activist investing seems to be a good thing since it can help resurrect a company and improve its value. But as with anything in investing, there are two sides to a coin. Let’s look at the advantages first. The Good Part about Activist Investors Coming In Activist investors can really get things done since they’ve got a great deal of influence with the management. They can make stuff happen for the better, www.tradezero.co
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unlike individual investors or shareholders with just some hundred or thousand shares who control a very insignificant amount of outstanding stock. Activist investors or shareholders usually have the capability to purchase significant quantities of stock, and that makes them powerful and influential. They can also get the press engaged. Thanks to all these factors, the company’s board and management are quite willing to work with them. In fact, activist investors can demand results owing to their influence and celebrity status, making the management work harder to increase the company’s value. These activist investors could also bring new, fertile ideas that could transform the company and make it more profitable. They often have clear ideas on improving the operations and managing assets. They could open up new opportunities for the company. When these activists buy a big percentage of the outstanding stock of a company, other investors or investing firms may copy their actions and also buy stocks in the company, hoping for good profit. That could push the share prices further up and benefit the shareholders. The Other Side of the Coin The downsides aren’t hard to figure out. In fact, these advantages could end up being disadvantages as well. We did talk about the share price increasing. But it all depends on the discretion of the activists. If they suddenly decide to drop off their shares, it produces the opposite result on the price of the shares. Activists can exert www.tradezero.co
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greater influence on the management, as we say, but they need not always be right with their ideas. And that could take the company through a downward spiral. Activists are usually great at getting shareholders, management and the media to understand their point of view. But they could be working for their best interests rather than the interests of the company. Other investors must also be careful to follow activists, since their frame of investment could be quite different from that of an average investor. Activists could be more willing, and have the resources, to accept a loss. It is always important to study the particular situation a company is involved in, to realize if the enthusiasm of activist investors towards it is good or bad for it. That can help you plan your move.
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