Deal stock is the stock of a given company that may be considered a bargain or a deal under current circumstances. Outstanding shares of stock become deal stock when rumors about upcoming events that will impact the value of the stock begin to circulate. The rumors may have a positive or negative effect on the perception of the stock on any market where the shares are traded.
One of the more common types of rumors that will create deal stock involves word of a merger or takeover. If the perception is that the merger will benefit the company in some manner, the rumor may motivate investors to go ahead and purchase outstanding shares before they begin to appreciate in value. At the same time, if the merger is expected to ultimately be damaging for the company, investors may take steps to being selling off any shares currently held in order to avoid losing money when the value of the shares drop.
The same is true if rumors of a takeover attempt begin to circulate. When a company is perceived as being the target of corporate raiders who would dismantle the company and sell off assets, outstanding shares may temporarily become very popular with other investors. The rationale is that by grabbing the deal stock, investors stand to make a sizable profit as the raiders attempt to secure a sufficient number of shares to manage the takeover. However, if the hostile takeover is thought to be undertaken by another entity that is likely to run the business as is, shareholders may try to unload the stock before the takeover begins and thus avoid a drop when consumer confidence in the company begins to decrease.
It is important to realize that deal stock is not created by any factors based on reality. Because the whole concept is based on perceptions and rumors, the impact on the outstanding shares of stock may last for only a short time. Investors who are benefiting from a temporary rise in deal stock will usually monitor the value of the stock closely. This makes it possible to sell the shares just as they peak and thus maximize the return generated by the rumors. Other investors who recognize that the rumors creating the deal stock have little to no basis in fact may choose to simply hold on to their shares until the trading activity returns to normal.
