What is the impact of Bonus share issue & Stock split on share price ?

Bonus issue and Stock split are the two common corporate actions which people usually get confused with. What is the difference between these two? Which is more beneficial to the shareholders? Will the share price increase on issue of Bonus shares and Stock split? A must read article for beginners in stock market to learn about Bonus share, Stock split, Announcement date, Record date, Ex- Bonus date and Ex- Split date.

What is Bonus Share issue

In simple words, a Bonus share is a free additional share given to the shareholder by the company. Naturally, a question comes to our mind. Where does the company get money for these additional shares? It is the profit of the company converted to shares and given to its shareholders. Generally, the profit earned by a company is utilised in 2 ways.

1. Re-invest into the business
2. Distribute among its share holders and cheer them up.

The distribution can be done in multiple ways :-

1. Give a percentage of the profit as money. It is called dividend. This can be given as single or multiple instalments a year.
2. Give as Bonus Shares. A part of the company's profit will be reserved and when it reaches a big amount, it is converted into shares and distributed among its shareholders.

Issue of Bonus share indicate that the company is in healthy condition and is making good profit. Bonus shares are announced in proportion. If a company 'X' announces 1:1 bonus, the shareholder will get additional 1 share( absolutely free of cost) corresponding to each share he holds. i.e.. If he had 100 shares of the company, before the issue of share, he will get 100 additional shares and he will have 200 shares in total after the issue of bonus.

Reasons for Bonus share issue

There are mainly 3 reasons for a company to issue bonus. They are:

1. To reward its shareholders

Bonus is a reward to the shareholder by the company. By issuing bonus, the company earn the trust and confidence of its shareholders . It is a motivation for the shareholders to invest more in the company.

2. To increase the number of shares

Issue of bonus shares will increase the total number of shares in the market. Suppose, a company has 2 million shares and it issues 1:1 bonus. After the issue, the company will have 4 million shares in market.

3.To bring down the market price of the share and make it affordable for trading

Shares price will increase gradually if the company is making profit. If the price is too high, the volume of shares traded will come down. On issuing bonus, the stock price will be reduced according to the bonus ratio and more people can afford it. Bonus issue is a way by which some companies do fund raising. When bonus share is announced, people buy more share of the company to get the benefit of bonus shares. This will boost up the share price of the company. After the record date, the price of the share will be corrected, and the share will be available for lesser price in the market. The share price becomes affordable to the small scale investors who couldn't buy at the higher price.

Impact of Bonus share issue on share price

The face value of the share will not change on bonus issue where as the market value will be adjusted according to the bonus ratio. i.e. if a company having shares with face value 10 and market price 150, issue 1:1 bonus, then, after record date, the number of shares will double and the market value will be down to 75 whereas the face value will be 10 itself. One important point to note is that your ownership in the company will not increase even if the number of shares you hold increase after receiving bonus. This is because, suppose, you had 10,000 shares in a company with a total of 10 million shares . This means, your ownership in the company is 1%. Suppose, the company announced 1:1 bonus share. After record date, you will have 20,000 shares in hand. But, the company's total share in market will also double. That is, you will be holding 20,000 shares out of 2 million shares. So, your ownership will remain as 1% only.

Can I make profit if i buy share of the company which is about to issue bonus?

Issuing bonus is a way to increase the number of total shares of the company.Usually, the companies with a solid base issue bonus shares. On record date, the share price will be corrected as per the ratio of bonus issue. It is seen that the share price increase within days of bonus issue announcement and people make profit out of it. Buying shares on announcement and selling it just before ex-bonus date or a few days after getting the bonus shares is a good way to make money in case of short term investors. But, there are other factors also which decide the share price. But,If you are a long term investor, consider all the factors that affect the share price before investing.

What is Record date and Ex-Bonus date ?

The terms Record date & Ex- Bonus date are very important in trading. When a company announces bonus, it mention two dates along with it; Record date & Ex- Bonus date. Ex-Bonus date is the date on which the company's shares are traded without (Ex) bonus. People who hold the shares of the company on Record date will be eligible for the bonus. The shares will be traded at the new adjusted price on ex-bonus day. I will explain this with an example. Suppose a company having Rs.400 per share, announces 1:1 bonus on June 25th(Announcement date). Let the Ex- bonus date is August 20 and the Record date is August 21. The shares will be traded for the new adjusted price on ex-bonus date. That is, on August 20th, the shares will start trading at Rs.200. Only those who have shares in their Demat account on August 21st will be eligible for bonus. So, if you want to avail the bonus, then you must buy the share on or before August 19. This is because, in India, it will take 2 days for a transaction to complete. ie. If someone buy a share, it will be allocated to his Demat account on the second day only. Thats why the Ex- Bonus date is fixed 1 or 2 days in advance to the Record date. Then, who will get the bonus benefit of shares traded on Ex- bonus date? Obviously, the seller will be eligible for the bonus. Because, as per company records share holder will be seller on Record date since the transaction wouldn't be completed by that time. In simple words, those who buy shares on ex- bonus date will not be eligible for bonus whereas those who sell it on ex-bonus date will be eligible for bonus issue.

When will the bonus share be credited to the demat account

The number of days taken to credit the bonus shares to the shareholder's account will be different for different companies. The record date determines when you are eligible for the bonus shares. It may take upto 1 month for the bonus to be credited to the shareholder's account.

What is Stock split

A stock split is simply dividing the number of shares of the company. Companies split their stocks when the market price of the share becomes too high. On stock split, the market price will be adjusted as per the ratio of split thereby making it affordable to buy. Unlike bonus issue, the face value of the share will be changed on stock split.

Similarities & Differences between Bonus issue and Stock split

Although, stock split and bonus may seem similar, there are some basic differences.

The similarities are:

1. The no. of stocks will increase in both cases according to the ratio of split or bonus announced.
2. The market value of the share will reduce after split and bonus to adjust the increase in stock.
3. The total share capital of the company will remain the same.

The Difference are :

1. In case of bonus issue, the face value will remain the same. But, for stock split, the face value will reduce as per the split. For e.g.; If a company with face value of share Rs.10 announce 1:1 stock split, then, the new face value after the split will be Rs.5. But, if the company gives a bonus in 1:1 ratio, the face value of the company will be Rs. 10 itself after the bonus issue.
2. A stock is usually split to make the price affordable and to increase trading. Bonus shares, on the other hand, the profit of the company given to its shareholders instead of a dividend.

Impact of Stock split on share price

Unlike in case of bonus shares, the face value of the stock will change on stock split. For eg. Suppose, a company ABC with face value Rs.10 announces stock split in the ratio 1:1. The share may be quoting in the market for Rs. 300. Those who hold the share on Record date will be eligible for 1 extra share for each share he holds. i.e.. If a person has 500 shares of ABC company on the record date, he will get additional 500 shares. This shares will be automatically credited to his account within days. The face value of the share will be Rs.5 after the record date. And the share will be traded in market for Rs.150 from ex-split date. This market rate may be a little high than Rs.150 since many people will buy the share since it becomes affordable to them.


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