BONUS SHARES, STOCK SPLIT & Their Market Impact

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These are the events Initiated by the Board of Directors of the company that Impact all the Shareholders and participation in such events is Mandatory in Nature called Mandatory Event

There are various types of Mandatory events some of them are:

  1. Bonus Share
  2. Stock Split
  3. Reverse Stock Split
  4. Dividends
  5. CAPD/ ROC 
  6. Exchange Mandatory 
  7. Mandatory Conversions
  8. Merger
  9. Demerger/ Spinoff
  10. Name Change
In this article, we will cover Bonus shares & Stock split with their impacts on the market in detail
                                          
                                   

BONUS SHARES:

A bonus share is a share issued by the company to its position holders which is a fully paid share without any charges. The new share is issued in the form of a bonus to the shareholder and the face value (FV = 10) will be the same as the existing face value of the security (i.e.FV 10 per share).

Bonus shares are issued by a company when it is not able to pay a dividend to its shareholders due to a shortage of funds in spite of earning good profits for that quarter. In such a situation, the company issues bonus shares to its existing shareholders instead of paying dividends.


Issuing bonus shares to the shareholders is also called the Capitalization of profits because it is given out of the profits or from the reserves of the company.

Bonus is paid to the shareholders according to their existing stake in the company. for Example., If the company announced Bonus shares with a ratio of 1:2, it means the shareholder will get one fully paid share for every 2 shares he holds.

Suppose Shareholder X holds 500 shares of the company then, he will receive 250 new fully paid shares as a result of corporate action.

MARKET IMPACT

The impact of Bonus shares in the market can be seen on the ex-date when the price gets adjusted with respect to the ratio of the bonus announced in the market, let's consider the above example of Shareholder X who holds 500 Shares of the company lets say CMP 100 per share, total capital infused is 500*100 = 50000 Rs,  and the company announced for the bonus of 1:2 then at the end X will receive new 250 shares and the total shares in his portfolio will now be (500+250= 750) and the price of each share will now be adjusted to 66.666 per share in the shareholder's portfolio. And the same price will adjust in the market to Rs 66.66 on the ex-date. The end result is that the number of shares of the shareholders gets increased (Each with FV 10 Rs) for the shareholders where as the infused capital will remain the same.

STOCK SPLIT

A stock split is done to increase the liquidity of the security in the market and to make shares affordable for the various investors who could not able to by the shares previously due to their High price. As the name suggests it split the shares in the approved ratio announced by the company.

                                   

When the company goes for the stock split the outstanding shares in the market get increased whereas the market capitalization will remain the same.

Many people think that the bonus shares and stock split are the same as they both have the same market impact if issued in the same ratio, but they have different impacts on the books of the company. Bonus shares only change its issued share capital whereas a stock split, splits the company's authorized share capital.

A stock split is also paid to the shareholders according to their existing stake in the company. Example., If the company announced a Split with a ratio of 10:1, it means the shareholder will get 10 shares (of FV 1 per share) for every 1 share (of FV 10 per share) he holds.

NOTE: Let's say X holds 1 share of FV 10 and the company split 1 share into 10 (10:1) then this 1 share gets split into 10 shares and the FV then changes into ( FV 10/10 = 1 FV) means X will now hold 10 shares of FV 1 Rs each.

Now, Suppose Shareholder X holds 500 shares of the company then, he will receive 4500 shares as a result of corporate action.

MARKET IMPACT

The impact of a stock split in the market can be also seen on the ex-date when the price gets adjusted with respect to the ratio of the bonus announced in the market, let's consider the above example of Shareholder X who holds 500 Shares of the company lets say CMP 100 per share, total capital infused is 500*100 = 50000 Rs,  and the company announced for the split of 10:1 then at the end X will receive new 4500 shares and the total shares in his portfolio will now be (500+4500= 5000) and the price of each share will now be adjusted to 10 per share in Shareholders portfolio. And the same price will adjust in the market to RS 10 per share on the ex-date. The end result is that the number of shares of the shareholders gets increased and the face value is also adjusted from FV 10 per share to FV 1 per share for the shareholders where as the infused capital will again remain the same.



Location: Pune, Maharashtra, India

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