Investing in the stock market may be both thrilling and intimidating. Two common corporate actions that often puzzle new investors are “Bonus Issues” and “Stock Splits.” In this article, we’ll break down these concepts in easy language to help anyone understand their significance in the Indian stock market.
A bonus issue, sometimes referred to as a bonus share or scrip issue, is a business decision in which a corporation chooses to give its current owners more shares at no additional expense. In essence, it functions as a gift from the business to its investors.
When a company gets profit, it has two options: first, it can give dividend to its shareholders and second, it can give bonus to its shareholders.
Let’s imagine that XYZ Ltd. announces a 1:1 bonus declared. Means, 1 Bonus share for every share held.
If 1:2 bonus declared then, 1 bonus share for every 2 share held.
If 3:1 bonus declared then, 3 bonus share for every share held.
Example: Bonus declare 1:2.
Before Bonus declared,
No of Share = 100 /-
Share Price = 300 /-
Investment Value = 30000 /-
After Bonus declared,
No of Shares = 150 (1 share for every 2 share held)
Share Price = 200 /- (Price reduce 1:2)
Investment Value = 30000 /-
Before Declare 1:2,
Share Capital = 10Cr. (10 /- * 1 Cr.) (Share Capital = Face Value * No of Shares)
Let’s Reserves = 50 Cr.
Total Share Hold Equity = 60 Cr.
After Bonus declared,
Share Capital = 30 Cr (10/- * 3 Cr.)
Reserves = 30 Cr.
Total Share Hold Equity = 60 Cr.
Purpose of Bonus Issues:
Retaining Investors: Companies often use bonus issues to reward existing shareholders and maintain their loyalty.
Increasing Liquidity: By increasing the number of outstanding shares, bonus issues can enhance the liquidity of a stock.
Adjusting Share Price: While the market value of the investment remains the same, the share price typically adjusts after a bonus issue. For example, if the stock was trading at Rs. 500 before the bonus issue, it might adjust to Rs. 250 post-bonus issue with the increased number of shares.
Investors often see bonus issues favorably because they give them the chance to add more shares to their portfolio without having to make further investments.
What is Stock Split?
A stock split is another corporate action that involves dividing existing shares into multiple shares. Unlike bonus issues, a stock split doesn’t offer additional shares for free; instead, it adjusts the stock price and the number of shares outstanding.
Let’s say you are an owner of 100 shares of ABC Ltd. 1:5 Stock Split. Means, your one share divided into five equal parts.
Example: Stock Split 1:5.
Before Stock Split,
No of Share = 100 /-
Share Price = 300 /-
Investment Value = 30000 /-
After Stock Split,
No of Shares = 500 (100 * 5)
Share Price = 60/- (300/5)
Investment Value = 30000 /-
Before Stock Split 1:5,
Share Capital = 10Cr. (10 /- * 1 Cr.) (Share Capital = Face Value * No of Shares)
Let’s Reserves = 50 Cr.
Total Share Hold Equity = 60 Cr.
After Stock Split,
Share Capital = 10 Cr (2/- * 5 Cr.)
Face Value Reduce 10 to 2 (10/5=2)
Reserves = 50 Cr.
Total Share Hold Equity = 60 Cr.
Purpose of Stock Splits:
Enhancing Liquidity: Similar to bonus issues, stock splits aim to increase the liquidity of a stock by making it more affordable for a broader range of investors.
Psychological Impact: Lowering the stock price through a split can make the shares seem more attractive to retail investors.
Adapting to Market Conditions: Companies might opt for stock splits to adjust their stock price to a more favorable level, especially if the stock has experienced substantial price appreciation.
Stock splits are generally considered a positive move, as they make shares more accessible to a wider investor base. While the total value of the investment remains the same, investors end up with more shares at a lower per-share price.
Conclusion:
Mostly there is no effect on your portfolio, your investment value remains same after bonus issue or stock split.
In the dynamic world of the stock market, bonus issues and stock splits are common strategies employed by companies to manage their capital structure, reward shareholders, and adapt to changing market conditions. For investors, understanding these concepts is crucial for making informed decisions and navigating the ever-evolving landscape of the Indian stock market. Whether it’s the generosity of a bonus issue or the strategic adjustment of a stock split, these corporate actions play a vital role in shaping the investment experience for shareholders.
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