Tracking stock is a form of security issued by a company for a particular purpose. Essentially, tracking stocks function as a way of evaluating the performance of a particular line of business or a subsidiary of a larger company. Because the tracking stock has to do with a specific component of the overall business, it does not impact the stock issued for the company at large.
Tracking stock is a different approach than what is known as spin-off stock. With a spin-off, stock is issued on an entity that is set up with a different operating structure than the main company. With a spin-off arrangement, there is usually a need to make a few fundamental changes in the basic structure of the business. The issuance of tracking stock does not require any such changes.
The use of tracking stock is common in many different industries. Entertainment companies made use of the tracking stock model at the beginning of the dot com boom in the 1990’s to launch online divisions that still operated within the framework of the main company. Telecommunications companies also made use of the tracking stock model during the diversification of the 1980’s and 1990’s that led to many telecoms offering new lines of communication services that were different from their core business. While the trend has leveled off somewhat in recent years, tracking stock remains a viable way of doing business.
For the investor, tracking stock can represent an excellent way to earn dividends. Depending on current market opportunities, the dividend earned per share may be quite substantial. However, tracking stock is not immune to the usual potential of risk that is involved with any type of investment. As with any investment activity, investors should research the opportunity thoroughly before purchasing any shares of trading stock. This includes considering the historical performance of the stocks of the main company, as well as evaluating the potential of the trading stock proper.