How to Accrue Contingent Shares

by Mike Parker

Shares of stock represent ownership in a company, and each individual share represents an equal amount of ownership with every other share of the same class of stock. Companies may issue stock as a means of raising capital for a variety purposes, such as to fund expansion or for new product development. Companies may also offer contingent stock. These shares are only issued if certain predetermined events occur, and an investor can only acquire contingent stock once those conditions are met.

Contact the investor relations department of the company you are interested in investing in and request a copy of its annual report or prospectus. Provisions for the issuance of contingent stock are typically outlined in these documents. There is no universal standard for the issuance of contingent stock, and not all companies have such provisions. Contingent stock may be issued upon the company reaching a predetermined milestone, such as a specified level of earnings, or it may agree to issue contingent stock after a specified amount of time has passed. Determine whether the company whose stock you are interested in acquiring has any provisions for issuing contingent stock.

Align yourself with the company's provisions for acquiring contingent stock. Since provisions for receiving contingent stock may vary from company to company, or even from event to event within a company, this can be a complex procedure. A company may only offer contingent stock to shareholders of record as of a specific date. It may only offer contingent stock to employees of the company or to certain members of company management. You must meet the individual company's requirements to accrue these contingent shares of stock.

Understand the ramifications of your contingent shares. Contingent shares are only issued based on the company meeting certain objectives, and there is typically little or no money transfer involved in the transaction. This has a diluting effect on the company's earnings per share, meaning there are more outstanding shares of company stock, but the company didn't raise any more money by issuing those shares, so the earnings per share and the inherent value of each share of stock may decrease. There may also be certain tax considerations, becaue the Internal Revenue Service may regard contingent shares as a taxable form of compensation. There will also be tax consequences regarding investment income or loss when you sell your contingent shares.

Warnings

  • Since the issuance of contingent shares is by definition tied to a specific set of circumstances, there is no guarantee that those shares will be issued.
  • All stock investments involve a certain level of risk. You may lose some or all of your investment.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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