Tracking Stock: What It Is, Pros and Cons, Examples

Tracking stock is a class of shares issued by a parent company to reflect the financial performance of a specific division or subsidiary, rather than the company as a whole. Unlike traditional common stock, which represents ownership in an entire corporation, tracking stocks allow investors to focus on particular business segments within the company. These specialized shares give stockholders an economic interest in a division’s performance without granting direct ownership rights to its assets. While the parent company maintains control over the tracked division, investors can benefit from its growth potential.

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What Is Tracking Stock?

Tracking stock represents a specialized financial instrument that allows companies to separate the performance of specific business units from their overall operations. When a corporation issues tracking shares, they’re creating a mechanism for investors to participate in the performance of a particular division without the parent company relinquishing control.

These shares typically come with limited or no voting rights, distinguishing them from traditional common stock.

The value of tracking stock fluctuates based on the financial results of the tracked division rather than the parent company’s overall performance. Companies often maintain separate accounting records for these divisions, providing transparency into their specific revenue streams and profitability metrics. This financial separation helps investors evaluate the tracked unit’s growth potential independently.

Why Do Companies Issue Tracking Stock?

Corporations often issue tracking stock when they believe a particular division is undervalued within their overall business structure. This approach can unlock shareholder value while maintaining the parent company’s operational control and tax advantages. Parent companies can also use tracking shares as currency for acquisitions or to incentivize management teams focused on specific business segments.

Pros and Cons of Tracking Stock

Tracking stocks can offer investors some appealing opportunities that would otherwise be hard to access. However, tracking stocks also come with drawbacks, including limited voting rights and potential conflicts of interest between the parent company and the tracked division.

Advantages of Tracking Stock

Targeted investment opportunities: Investors can focus on specific business segments they believe have strong growth potential without buying the entire company.
Valuation clarity: Tracking stocks can highlight the value of high-performing divisions that might be overlooked within a conglomerate structure.
Operational continuity: Parent companies maintain control over the tracked division while still attracting investment capital.
Tax efficiency: By issuing tracking stock, companies can raise capital without triggering taxable events that might occur in a full spinoff.
Strategic flexibility: Management can retain synergies between business units while still showcasing individual performance.

Disadvantages of Tracking Stock

Limited voting rights: Tracking stockholders typically have reduced or no voting power compared to regular shareholders.
Potential conflicts of interest: Parent companies may make decisions benefiting the overall organization at the expense of the tracked division.
Complex accounting: Maintaining separate financial reporting for tracked segments adds to the company’s administrative burden.
Allocation challenges: Determining how to distribute shared costs, resources and tax liabilities between divisions can be subjective in the absence of standard approaches.
Market confusion: Some investors find tracking stocks can be vmdifficult to evaluate due to the unusual ownership structure and potential governance issues.

Examples of Tracking Stock

Several major corporations have issued tracking stocks to highlight specific business segments, especially during the 1990s.

In 1999, after the merger of AT&T and Tele-Communications Inc., the Liberty Media tracking stock was created to represent the combined entity’s cable television assets. This allowed investors to invest in this growing division without buying the entire company.

Similarly, General Motors issued tracking stock for its Hughes Electronics subsidiary, which owned DirecTV. This gave investors a way to participate in the satellite television business while GM maintained control of the operation.

Dell’s issuance of tracking stock for VMware represents another notable example. After Dell acquired EMC (which owned a majority stake in VMware), they issued tracking stock to reflect VMware’s performance while keeping the businesses integrated.

Applera Corporation took an interesting approach by creating two tracking stocks: Applied Biosystems Group and Celera Genomics Group. This structure let investors choose between the stable scientific instrument business or the riskier but potentially more rewarding genomics research division.

These examples demonstrate how tracking stocks work in practice, giving shareholders targeted investment opportunities within larger corporate structures.

How to Invest in Tracking Stock

Tracking stocks can be spotted by examining their ticker symbols, which often include letters like “A” or “B” after the parent company’s symbol. For example, Liberty Media has issued tracking stocks under symbols like LSXMA and FWONA, representing different business segments.

Investors can find these specialized shares by researching companies that have created tracking stocks to highlight specific divisions. Financial news sources, company investor relations pages, and SEC filings (particularly Form 10-K reports) typically announce and detail these offerings.

When researching a tracking stock for potential investment, look for disclosure statements that explain the relationship between the tracking stock and parent company. These documents outline voting rights, dividend policies, and how financial performance is measured.

Most tracking stocks trade on major exchanges like the NYSE or NASDAQ, making them accessible through standard brokerage accounts. Before investing, compare the tracking stock’s performance against both the parent company and industry benchmarks to understand its relative value and growth potential.

Bottom Line

Two investors tracking stock in a portfolio.

Tracking stocks give investors a unique way to participate in specific business segments without buying into an entire company. These specialized shares reflect the performance of particular divisions while the parent company maintains control. Though they offer targeted investment opportunities and can highlight undervalued segments, tracking stocks typically come with limited voting rights and potential conflicts of interest. When evaluating these investments, examine ticker symbols, company disclosures and performance metrics to determine if the tracked division aligns with your investment goals and risk tolerance.

Investing Tips

A financial advisor can help you build and manage your portfolio to reach your goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Over time, certain investments may grow faster than others, changing your asset allocation. Rebalancing helps maintain your intended risk level. Also, be aware of the fees that you pay. Even small fees can eat into returns over time. Compare costs across funds and platforms to keep your portfolio efficient.