Ever wondered how companies isolate high-growth parts of their business to attract investors? 

The answer lies in something called “tracking stock.”

Tracking stocks are like mini-stocks within a larger company. They let you invest directly in a specific part of a company’s operations, like its booming mobile division or cutting-edge tech subsidiary. It’s a way for companies to raise funds specifically for these areas and for investors to bet on the success of that particular segment.

Interested in learning how these financial instruments work, how companies use them, and what they mean for your portfolio? Read on for a comprehensive look at tracking stocks and their strategic role in today’s financial markets. 

Decoding Tracking Stock

Tracking stock is a financial instrument given out by a company that is traded publicly. It shows the performance of one division or segment of this company, not the whole business like regular stock does. With classic stock, you get a part ownership in all assets and earnings from the complete company. But tracking stock is related only to results of one specific unit or business inside the main corporation. This method lets issuing corporations make use of special parts without needing to separate them legally from their parent companies.

The main goal of tracking stock is to give investors a direct economic stake in the results of one specific business unit, possibly increasing stock values for units with fast growth that could get diluted by broader corporate activities. For instance, if there is a technology company where the social media division grows quickly, they might offer tracking stock only for this particular part. This offers investors an option to invest in this high potential segment without being exposed to other operations of the company.

In structure, tracking stocks are given out to current shareholders and can be bought or sold on the open market, just like regular shares. But they often don’t grant the same kind of control or ownership. People who hold tracking stock probably have less voting power or none at all when it comes to making big corporate decisions for the broader company. On the other hand, their rights and dividends are not linked with overall success of the corporation but connected to financial results of specific divisions being tracked. 

This kind of setup allows a corporation to keep complete command over its subsidiaries or divisions while also providing some monetary involvement for investors who are interested in it. It can be beneficial for both the business as well as their shareholders because they might get more funds or concentrated investment plans through this setting. 

Mechanics of Tracking Stock

A mother company issues tracking stocks to make a type of financial item that imitates the results of a specific part, department or branch. This is done without needing an official business spin-off. If a company chooses to issue tracking stock, it still owns and controls the segment but now its monetary performance is reported separately which affects the value of that particular stock.

The method for giving out tracking stocks usually means dividing them among current shareholders. These shareholders get shares of tracking stock that match their current ownership in the corporation. Now, these stocks can be traded on the public market just like regular ones. The company that is issuing the tracking stocks has to give a clear description of divisions it tracks, including their operations, assets and financial information. This makes sure there’s transparency and accuracy in reporting things related to these parts being followed by investors or holders of this type of stock.

The first big distinction between tracking stocks and typical common stock is related to the rights of shareholders. With common stock, holders possess equity in the company along with voting rights that can impact corporate governance. On the other hand, tracking stockholders generally lack voting powers tied to wider corporate decisions. Their rights are often restricted only to certain choices affecting the tracked division. Additionally, if the company goes into liquidation, tracking stock shareholders usually come after common stock shareholders. Therefore, investing in tracking stocks may carry more risk, but investors can use tools like investment alerts to monitor the performance and risks associated with these stocks. 

Tracking stocks also have dissimilar methods concerning dividends and earnings reports. Dividends given on tracking stocks rely on the profit-making ability and cash flow of that particular division which it tracks, not the whole company. This situation lets investors benefit from areas with possible high growth without being exposed to dangers and instability in other operations of the firm. On the other hand, this division can also restrict the potential for increased value as seen in more combined operations. This is because tracking stock investors don’t get financial benefits from victories in different areas of the company’s business. 

Real-World Application: Case Studies of Tracking Stock

Stocks that track a business have already been utilized by big companies to emphasize the financial results of particular sections, apart from their larger operations. For example, General Motors in the late 1990s issued tracking stocks for Hughes Electronics which is a division of GM concentrated on defense and electronics. This was done with intention to highlight Hughes’ growth potential separate from GM’s automotive business. But this resulted in confusion among investors and problems related to governance, so Hughes got re-consolidated into GM before eventually being sold off entirely to News Corporation.

In 2015, eBay separated from PayPal and made tracking stocks for PayPal. This was done to draw in investors who wanted to invest specifically into the digital payments area that is distinct from eBay’s e-commerce sector. It was Carl Icahn, an investor activist, who supported this separation as he thought it would bring more value for the people holding shares. After separating from eBay, PayPal showed much better performance in the stock market compared with its previous time as part of a group under Ebay’s control.

Liberty Media, which holds a variety of media assets like Liberty Broadband and Liberty SiriusXM, has greatly applied tracking stocks. This method offers investors the ability to put money into specific sections of Liberty’s business. It improves clarity and investor involvement without requiring them to reorganize the whole corporation. The use of tracking stocks has been beneficial for managing the complicated portfolio of Liberty Media.

The results from these case studies are not one-sided. For companies such as Liberty Media, tracking stocks can help in rebalancing portfolios well and provide flexibility to investors. But for businesses like General Motors, such a method could bring about complexities and strategic reversals. Tracking stocks, while advantageous for strategic purposes, can also bring difficulties that need to be handled with caution to accomplish the desired objectives. 

Key Characteristics of Tracking Stock

Tracking stocks are issued by companies to link investor benefits with particular business sections, all this without creating distinct corporate units. Important features of tracking stocks are:

Voting Power: Tracking stocks often possess restricted or particular voting rights, distinct from the usual common stocks. Investors usually don’t have the ability to vote on wide corporate matters. They can only impact decisions that influence the business segment connected with tracking stock.

Dividend Entitlements: Dividends for tracking stocks are linked to the performance of specific divisions, not the total profitability of parent firms. This gives investors a direct advantage from a business unit’s accomplishment. Dividend policies may greatly differ and are explained in the issuance prospectus.

Liquidation Preferences: During liquidation, there is a possibility that tracking stockholders might face less favorable conditions than common stockholders. This is because their rights are limited to the assets of the particular division that their stock tracks. This could reduce their financial recovery in case of liquidation events.

Conversion Options: A few tracking stocks have conversion options. This means that the investor can change their shares into common stock of the main company, but only if specific circumstances are met. The advantage is flexibility for investors – they can switch to the parent company’s stock if it becomes more beneficial or if the tracked division performs poorly.

The special features of tracking stocks create distinctive investment choices that have certain risks and benefits not found in regular common stocks. 

Classifying Tracking Stocks

Investors can use tracking stocks to invest in particular sections of a company, without needing shares in the whole firm. These stocks are divided into two types: those based on equity and those based on assets.

Equity-Based Tracking Stocks: These stocks are connected with the financial results of a particular business unit, yet they don’t depict direct ownership. This enables investors to profit from the growth potential of a division without depending on how well or not so well other parts within its parent company perform. Diversified companies create these stocks for emphasizing high-growth divisions. They lure in investors who wish to focus only on specific markets without taking risks related to other operations carried out by that very same corporation.

Asset-Based Tracking Stocks: These types of stocks are linked to the assets of a particular division. They provide a direct stake in the assets and cash flows, typically employed when an organization desires to separate a business unit but still maintain control. This permits the main company to convert its resources into money while investors can directly partake in gains and losses within that segment.

For instance, a tech conglomerate could create equity-based tracking stocks for its AI division in order to entice investors who are concentrated on AI technologies. On the other hand, a multinational might issue asset-based tracking stocks for one of its divisions dedicated to real estate – this provides more straightforward ownership in assets.

Tracking stocks give assistance to companies in managing the expectations of investors and their perception in the market, by creating customized investment possibilities that match up with particular business areas. 

Investor Perspective: Advantages and Disadvantages

The tracking stocks investment has its own advantages and risks. One important benefit is that it lets you focus on particular parts of a bigger corporation. If, for example, the technology division of a company is doing well, investors may put money into this segment directly which could possibly give them more profits compared to buying shares from the wider company.

But, there are considerable dangers too. One big disadvantage is that tracking stocks do not carry voting rights. This means investors cannot have a say in more general corporate choices, which could cause troubles if these decisions affect the division portrayed by the tracking stocks in an adverse manner.

Moreover, there is an increased downside risk with tracking stocks because they often have a lower priority in terms of liquidation. If a company becomes bankrupt or goes through financial stress, investors who hold tracking stocks are usually among the last ones to receive any leftover assets. This characteristic makes these types of investments carry greater downside risk compared to common stocks.

Moreover, market perception and liquidity are also challenges. Viewed by some as more intricate or less clear than regular equity, tracking stocks might have reduced liquidity and increased price swings which could impact their market value.

To sum up, tracking stocks provides more specific chances for investment and improved openness in certain business units. However, it can also bring risks like less influence over corporate governance, possible problems with liquidity (having enough cash), and larger financial uncertainty during difficult situations. Investors need to think about these things carefully before deciding if tracking stocks fit well with their investment plans and how much risk they are willing to take on. 

Corporate Perspective: Strategic Benefits and Risks

Companies might choose to issue tracking stocks as a tactic to reveal hidden value and concentrate the concentration of investors on rapid growth areas. This method enables direct investment in particular divisions, possibly resulting in increased valuation for those units because they possess unique growth potentials and performance measurements. It is good for big, varied companies where good-performing divisions could be underestimated within the company’s overall structure.

A large advantage of giving tracking stocks is the chance to collect funds especially for certain divisions, without spreading ownership in the main business. This method can finance expansion projects for new or quickly developing markets without utilizing resources from the whole company. Moreover, it helps in keeping these divisions separate and flexible which promotes innovation and swift responses to alterations within market conditions.

However, there are risks to keep in mind. A main worry is the possibility of conflicts inside the corporation. Different divisions having separate tracking stocks could create competition for company resources and investor focus, causing inefficiencies and conflict among senior management. Also, the use of tracking stocks may bring confusion in the marketplace about a company’s corporate structure. This can possibly cause problems related to governance and responsibility.

Another danger is about how the market sees and accepts things. Investors might doubt the valuation and clarity of financial details for each tracked unit, causing uncertainty in the tracking stock’s value and potentially increasing its exposure to systematic risk due to its correlation with the broader market. This can also cause problems with its marketability, making it difficult for the company to use these financial instruments in an efficient manner. 

To sum up, even though tracking stocks can show the worth of certain parts and bring in focused funds, they also bring about dangers like inner disputes, complications with governance and market doubt. Companies need to think thoroughly before deciding if tracking stocks are in harmony with their far-reaching strategic objectives. 


Tracking stocks are a special type of monetary instrument that bring advantages and difficulties to companies and investors. They let you invest in particular parts of a business, which could enhance clarity while enabling those who invest to enjoy the benefits from fast-growing segments within the company. For companies, tracking stocks might be an intelligent method of drawing investment without reducing their command over the complete corporation.

Nevertheless, the choice to give out tracking stocks is not something that should be done without consideration. Handling various classes of stock might bring about difficulties in governance and create internal competition for resources. Investors need to carefully examine the basic aspects of the tracked division, as well as think about added risks that come with these types of investments.

In the end, tracking stocks can be a useful tool in certain situations. It lets companies make sure they are increasing the value for their shareholders while giving investors an opportunity to directly join in the achievements of particular business units. Both companies and investors should consider potential benefits with risks and complications, so they can decide well according to what is financially best for them.

Interpreting the Tracking Stock: FAQs

What are the Primary Reasons a Company Might Issue a Tracking Stock?

The main reason why companies create tracking stocks is to emphasize the worth of certain divisions that could be undervalued within the bigger company. This method permits the market to value high-growth parts more precisely without entirely selling them, potentially allowing investors to close positions in the parent company and focus solely on the tracked division. This could unlock shareholder value and attract investment focused on those specific divisions. 

How Do Tracking Stocks Influence Shareholder Value?

Tracking stocks might boost shareholder worth since they let investors directly invest in particular units of a company that are performing well. This clarity could result in more precise valuation of those units. On the other hand, tracking stocks could introduce intricacy and danger which might have an adverse impact on overall shareholder value if not handled correctly.

Can Investors Tracking Stocks Influence Corporate Decisions?

In most cases, tracking stock investors have less or no say in the bigger corporate choices of the main company. Their impact is often restricted to only the operations of a particular business unit linked with their tracking stock and still then, they may not possess as much influence compared to individuals who own common stocks and can exercise full voting rights.

What are the Tax Implications of Investing in Tracking Stocks?

The tax effects of tracking stock are comparable to those for usual stock investments. This includes paying capital gains taxes when selling shares of tracking stocks and being taxed on any dividends received. But, there could be special tax inquiries that come up during conversions or restructurings related to tracking stocks, so it’s good for investors to talk with a taxation expert.

How Does the Performance of Tracking Stocks Compare to Traditional Stocks?

The way tracking stocks perform can be quite different from how regular stocks do. Although they might give more profit if the particular business unit does good, they could also be more unstable and dangerous. The success of tracking stock is mainly linked with the unit it represents, not to the parent company’s overall performance.