Interesting piece on tracking stocks...
Q. What are "tracking stocks"? I've seen them mentioned in connection with AT&T, GM, and DuPont and other companies.
A. Bought and sold like regular stocks, tracking stocks are usually issued by companies with several different lines of business. They serve as an attractive alternative to spinning off divisions.
Imagine Buzz-n-Boom Corp. (ticker: BZBM): it runs a chain of hair salons and also manufactures fireworks, which are more profitable. A high interest level in fireworks might spur the company to issue a tracking stock for the fireworks business. This will help investors see the value of the fireworks operations, separate from coiffures. It may also permit Buzz-n-Boom to profit, perhaps raising money by issuing more shares at the tracking stock's higher valuation.
The downside to tracking stocks is that they're not backed by corporate assets in the same way as regular stocks. With regular common stock, shareholders own a chunk of the underlying company. With tracking stocks, the company retains ownership, but shareholders get to enjoy returns that track a specific part of the company's business.
There are only a few dozen tracking stocks out there right now. An example is General Motors' Hughes Electronics unit, which deals not with cars, but with telecommunications, space and satellites.
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