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What Are Spin Off Stocks?

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Spin Off Stocks Basics

spin off stocks

Spin off stocks are the products of parent companies which separate segments of the original company and turn them into independently operated businesses. These newly created businesses issue their own stocks. Shareholders in the original company typically receive shares of the new business. Parent companies often do this in order to unlock the potential stock performance of the separated division.

Pure and Partial Spin Off Stocks

Pure spin off stocks result when the newly created company possesses the exact same body of shareholders as the parent company. The advent of the new company, in such cases, does not begin with an initial public offering because the shares are already owned. Since this is often done without consulting the wide base of shareholders, they may receive stocks in a company that does not interest them. This results in a general sell-off, which can initially depress the price of the spin off stocks.

However, this also creates an opportunity for outside investors to take advantage of temporarily low prices and buy a significant number of shares in a promising new venture. Freed from the restraints of the parent corporation, companies issuing spin off stocks often manage to use their freshly unleashed energy to perform better in the market than they were before the division. This drives the stock values back up again.

Partial spin off stocks come into existence when a parent company sells less than 20 percent of the stock in a spin off company to the public. This is a type of initial public offering. Companies may have one or more reasons for proceeding with a spin-off this way. Sometimes they do this in order to raise capital for the parent company. The partial separation still results in spin off stocks with their own stock price.

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