A stub is the remaining

capital stock In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, ...

representing the equity in a

corporation A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...

after a major cash or security distribution—such as a

buyout In finance, a buyout is an investment transaction by which the ownership equity, or a controlling interest of a company, or a majority share of the capital stock of the company is acquired. The acquirer thereby "buys out" the present equity holde ...

spin-off Spin-off, Spin Off, Spin-Off, or Spinoff may refer to: Entertainment and media *Spinoff (media), a media work derived from an existing work *''The Spinoff'', a New Zealand current affairs magazine * ''Spin Off'' (Canadian game show), a 2013 Canad ...

, or

demerger A demerger is a form of corporate restructuring in which the entity's business operations are segregated into one or more components. It is the converse of a Mergers and acquisitions, merger or acquisition. A demerger can take place through a cor ...

—removes most of the company's operations. A stub may retain the name of the original corporation or adopt a new one as part of the

restructuring Restructuring or Reframing is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. ...

. When the main operating business is spun off or distributed, a stub may remain. This typically consists of residual

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

, liabilities, or cash reserves.

How Stub Stocks Arise

Stub stocks commonly arise through spin-offs, where the

parent company A holding company is a company whose primary business is holding a controlling interest in the Security (finance), securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own Share ...

distributes shares of a

subsidiary A subsidiary, subsidiary company, or daughter company is a company (law), company completely or partially owned or controlled by another company, called the parent company or holding company, which has legal and financial control over the subsidia ...

to existing

shareholders A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

. A well-known example is the case of

3Com 3Com Corporation was an American digital electronics manufacturer best known for its computer network products. The company was co-founded in 1979 by Robert Metcalfe, Howard Charney and others. Bill Krause joined as President in 1981. Metcalfe ex ...

and

Palm Palm most commonly refers to: * Palm of the hand, the central region of the front of the hand * Palm plants, of family Arecaceae ** List of Arecaceae genera **Palm oil * Several other plants known as "palm" Palm or Palms may also refer to: Music ...

. In 2000, 3Com spun off Palm, but retained approximately 95% of Palm's

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

. The remaining equity in 3Com traded as a stub—low-priced and highly speculative compared to Palm’s high valuation. In 2000, 3Com spun off Palm but retained approximately 95 % of its shares; the stub value of the remaining 3Com equity was implied to be negative when comparing 1.5 × Palm’s closing price of US $95.06 to 3Com’s closing price of US $81.81. Stub stocks may also result from

bankruptcies Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

and recapitalisations, when bonds are exchanged for

equities Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion t ...

as part of a restructured capital structure.

Investment Risks and Valuation

Stub

stocks Stocks are feet and hand restraining devices that were used as a form of corporal punishment and public humiliation. The use of stocks is seen as early as Ancient Greece, where they are described as being in use in Solon's law code. The law de ...

often trade at lower valuations relative to their former parent companies, reflecting higher perceived market uncertainty.

Investors An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of in ...

assess factors such as debt load,

cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

, and potential for future value recovery if the stub entity is successfully restructured.

Speculative Nature and Historical Context

Stub investments are considered speculative and high-risk. For example, during the

1987 stock market crash Black Monday (also known as Black Tuesday in some parts of the world due to time zone differences) was a global, severe and largely unexpected stock market crash on Monday, October 19, 1987. Worldwide losses were estimated at US$1.71 trillion. ...

, the

Salomon Brothers Salomon Brothers, Inc., was an American multinational bulge bracket investment bank headquartered in New York City. It was one of the five List of investment banks, largest investment banking enterprises in the United States and a very profitabl ...

Stub Stock Index declined by 47.4%, compared to a 33% drop in the

S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and in ...

over the same period.

References

Corporate finance Restructuring Stock market Equity securities {{stockexchange-stub