Activist shareholder: Explained | TIOmarkets
BY TIO Staff
|June 28, 2024In the world of trading and investments, there are numerous terms and concepts that traders must understand to navigate the financial markets effectively. One such term is 'Activist Shareholder.' This term refers to an individual or group that purchases large numbers of a public company's shares and tries to effect change within the corporation. This article will delve into the intricacies of what an activist shareholder is, their motivations, strategies, and impacts on the trading market.
Understanding the role of an activist shareholder is crucial for traders as it can significantly influence the stock prices and overall market dynamics. The actions of activist shareholders can create lucrative trading opportunities or potential risks that traders need to be aware of. This comprehensive glossary entry aims to shed light on all aspects of activist shareholders, providing traders with the knowledge they need to factor this element into their trading strategies.
Definition of Activist Shareholder
An activist shareholder is an individual or an entity that acquires a significant amount of a company's shares with the intention of influencing the company's decisions and policies. These shareholders are not passive investors; they are actively involved in shaping the company's future direction. The level of influence an activist shareholder can exert largely depends on the proportion of shares they hold.
Activist shareholders are often institutional investors like hedge funds, private equity firms, or mutual funds. However, they can also be individual investors or shareholder associations. The primary goal of an activist shareholder is to increase shareholder value by pushing for changes that they believe will improve the company's performance and, consequently, its stock price.
Types of Activist Shareholders
There are two main types of activist shareholders: financial activists and social activists. Financial activists are primarily concerned with maximizing shareholder value. They push for changes that can improve the company's financial performance, such as cost-cutting measures, share buybacks, or strategic acquisitions.
Social activists, on the other hand, are more focused on influencing the company's policies regarding social, environmental, or governance issues. They believe that companies have a responsibility to consider the broader impacts of their operations and make decisions that are in the best interest of all stakeholders, not just shareholders.
Strategies Employed by Activist Shareholders
Activist shareholders employ various strategies to influence a company's decisions and policies. These strategies can range from engaging in private discussions with the company's management to launching public campaigns to rally support from other shareholders.
One common strategy is to propose shareholder resolutions at the company's annual general meeting (AGM). These resolutions can cover a wide range of issues, from executive compensation to environmental policies. If the resolution receives enough votes from shareholders, the company is obligated to implement it.
Proxy Fights
A proxy fight is another common strategy used by activist shareholders. In a proxy fight, the activist shareholder tries to convince other shareholders to allow them to vote on their behalf at the company's AGM. If the activist shareholder can gather enough proxy votes, they can influence the outcome of shareholder votes and push through their proposed changes.
Proxy fights can be a contentious and costly process, often resulting in a public battle between the activist shareholder and the company's management. However, they can also be an effective way for activist shareholders to exert influence, especially if they do not hold a majority of the company's shares.
Impact of Activist Shareholders on Trading
The actions of activist shareholders can have a significant impact on a company's stock price and trading volumes. When an activist shareholder takes a position in a company, it can create a sense of uncertainty among other investors, leading to increased volatility in the company's stock price.
On the other hand, the changes proposed by activist shareholders can also be seen as a positive signal by the market, leading to an increase in the company's stock price. For example, if an activist shareholder proposes cost-cutting measures that are expected to improve the company's profitability, this could lead to increased demand for the company's shares and a rise in its stock price.
Opportunities for Traders
The volatility created by activist shareholders can present opportunities for traders. Traders can potentially profit from the price movements caused by the actions of activist shareholders by taking a position in the company's shares. For example, if a trader anticipates that the changes proposed by an activist shareholder will lead to an increase in the company's stock price, they can buy the company's shares and sell them at a higher price once the stock price increases.
However, trading based on the actions of activist shareholders also comes with risks. The outcome of activist shareholder campaigns is uncertain, and the proposed changes may not always lead to an increase in the company's stock price. Therefore, traders need to carefully consider the potential risks and rewards before deciding to trade based on the actions of activist shareholders.
Case Studies of Activist Shareholder Campaigns
There have been numerous high-profile activist shareholder campaigns in recent years. These case studies can provide valuable insights into the strategies employed by activist shareholders and their potential impacts on the trading market.
One notable example is the activist shareholder campaign launched by Elliott Management against AT&T in 2019. Elliott Management, a hedge fund known for its activist shareholder campaigns, acquired a $3.2 billion stake in AT&T and proposed a series of changes to improve the company's performance. The news of Elliott Management's involvement led to a significant increase in AT&T's stock price.
Carl Icahn and Apple
Another high-profile case involves Carl Icahn, a well-known activist investor, and Apple. In 2013, Icahn took a position in Apple and pushed for the company to increase its share buyback program. Icahn argued that Apple's shares were undervalued and that a larger share buyback program would increase shareholder value. Apple eventually agreed to increase its share buyback program, leading to a rise in its stock price.
These case studies illustrate the potential influence of activist shareholders on a company's stock price and the trading market. They also highlight the need for traders to stay informed about activist shareholder campaigns and consider their potential impacts when making trading decisions.
Conclusion
Activist shareholders play a significant role in the trading market. Their actions can influence a company's stock price, create trading opportunities, and shape the future direction of companies. As such, understanding the role of activist shareholders is crucial for traders.
This comprehensive glossary entry has provided an in-depth look at what an activist shareholder is, their motivations, strategies, and impacts on the trading market. With this knowledge, traders can better navigate the financial markets and make informed trading decisions.
Join the Action as an Informed Trader
Now that you're equipped with the knowledge of what an activist shareholder is and how they can sway the markets, it's time to put that understanding into practice. At TIOmarkets, we empower you with the tools to trade over 300 instruments across 5 markets, including Forex, indices, stocks, commodities, and futures. With low fees and a global presence in over 170 countries, we're the platform of choice for over 170,000 traders. Enhance your trading skills with our educational resources and step-by-step guides. Ready to take the next step? Create a Trading Account today and join a community of informed traders at TIOmarkets.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.
Join us on social media
Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.
Trade responsibly: CFDs are complex instruments and come with a high risk of losing all your invested capital due to leverage.
These products are not suitable for all investors and you should ensure that you understand the risks involved.