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  • Category: Stock Market

    Why share price is almost half on a bonus share of 1:1 and splitting is done?

    Have queries about calculation of bonus share? Searching for details of such calculation on this page? Find advice from experts here for resolving your queries.

    Normally when company posts the good quarterly results, the management takes the decision to either share the bonus in terms of share or high dividend. On the other hand, when the share price is too high for buying by the retailer, the stock is split to half or any ratio decided by the management.

    I want to know, why share price falls almost half when bonus of 1:1 or half splitting is done?
  • Answers

    6 Answers found.
  • Bonus shares is a very misleading term. There is no bonus when it comes to shareholder's value.The increases in stock quantity are neutralized by the proportionate fall in stock price. There is no concept of bonus in many developed markets. They call it as the stock split.
    The stock split is decrease in face value of the shares. Shares in IPO are issued in standard denominations of Rs. 10. But prices of some shares increase very high. So it will be difficult to a normal customer to purchase at that high value. So companies tend to decrease the face value by splitting the shares.
    In India generally, have face value variations.But in the more developed market, all shares will have a face value of RS. 1. There is no concept of face value in the more developed market and the split is used to reduce the price of the shares. This is Indias will be called as 1:1 but in the US it is 2 for 1.
    One should remember that the value will not be doubled overnight which means if any company gives bonus shares that do not mean you would have the shares just added to your portfolio and share would be at the price before the bonus or split.
    A company share price is 100, let us say. The face value is 10. The investor would need to pay a premium of Rs.99 ( Rs100 for a share of 10 face value.It appears as very high as we have to pay ten times more than the face value.It may be difficult for many small investors. So the company will decide to split. That means the face value of the share will become 1 from 10.

    Say again after the split the price went up to 100. It is not possible to split it the stock anymore. So now instead of doing a split, the company will issue new shares. New shares are given to the investors but that does not mean your company grew by that many times overnight. Before the split, you had 100 floating shares in the market and now it will become 1000 shares. So the price of each of your shares will fall to 10 from 100 and now you will have 10 times more shares.

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  • Many times when a company wants to enlarge its equity base then it has few options like issuing bonus shares or issuing right shares to public at face value or at a premium.

    In the first option the company simply issues some shares in some ratio to the existing shareholders. The stock of shares in market or with the public is automatically increased and to compensate for that many more shares the price of the share immediately corrects by a similar factor. This is just a mathematical action.

    Now, immediately there will be no gain to the shareholder but this is traditionally seen as a good gesture from the company as well as good companies only are capable to do this. In future, if the company earnings increase the dividend payout will be on the increased shares with the shareholder benefitting him.

    Let us take an example of a company giving 2 shares for every 5 shares held by an investor. Suppose the shareholder has 300 shares of the company and it is quoting Rs 570 in the market before bonus. After bonus he will have 420 shares with him and share will quote approximately down at around Rs 407 and the value of the shares of that investor will remain same at Rs 171000.

    In case of issuing right shares, the company will get money from the shareholders and due to this, the price of the share in the market will not come down or in some cases can come down marginally. An investor, if wants, can sell his shares and make a profit.

    Knowledge is power.

  • A company can issue bonus shares to enlarge its share capital. These shares are given by the company to its existing share holders without charging from them any cost for it. As the shares are already quoted in the market their market prices are accordingly corrected depending upon the bonus ratio.

    If the bonus ratio is 1:1 then market price will come to almost half. If the bonus ratio is 1:2 (1 bonus share for 2 held) then price will come to around 67% of pre bonus price and like that in other cases.

    The share holder is benefited to the extent that his holding is increased and in future he will be entitled for dividend or right share etc on his new holding.

    Thoughts exchanged is knowledge gained.

  • Bonus share / share split is a kind of rewarding shareholders. This happens only when the company feels that they are doing business great and do it so, the retail investors or shareholders should get benefitted. The company feels that share price is too high for the buyers to attract. So they split it. For example, if a share value is 1000 rupees, it attracts very less number of investors. So the company splits it into 2 so the amount gets reduced to half. It attracts more investors. This is the logic behind the stock split. In many cases it indicates positive move of the company.

  • Bonus shares are the shares given to the existing stockholders in proportion to the number of shares they hold. 1:1 bonus means that a shareholder will get one share for each share held by him. For example, if someone is holding 100 shares, he will get another 100 hundred shares of the same company free of cost. A company issues bonus shares mainly to enlarge its equity base.

    Immediately after the issue of bonus share at the ratio of 1:1, the share price will come down (in this case, it will come down by 50%). But in the medium to long term, the share price of the good company starts moving upwards. So, the investors who earlier got the bonus share, make additional profit from the appreciation of share price.

    "If you are killed in action, you go to Heaven. If you win, you rule this Earth (as beautiful as Heaven). That is why, O son of Kunti, take a firm resolve and fight!"-- Shrimad Bhagwad Gita

  • It is pretty simple concept but with a very smart move by companies. Whenever a company posts a good profit it comes into limelight and people and investor want to invest in it to earn.
    Now, this is an opportunity for the company as the price of shares is high an indivudual investor or small investor cannot afford to invest much. So the company issues bonus shares and what actually happens that now there is surplus of shares in hands of existing shareholders. Now when a person gets additional shares for nothing, he starts to book profit by selling it and since the price of share has become half, individual investors or small investors starts to buy the same.

    This way the company also gets additional funds for its use and people also think that they got shares on which they can earn later.

    To explain you why the price of shares become half is pretty simple maths where the numerator remains same and denominator is doubled. E.g. you had 100 shares of 10 each and the total value was Rs. 1000, now company issues bonus of 1:1 that means now you have 200 shares but the value still remains same, as company did not charge anything from you for the shares issued to you. Since value is still ?1000 and you have 200 shares then the value of 1 shares becomes ?5 which was originally ?10.

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