please explain from investor pt of view?

Secondary Mkt 1514 views 18 replies

SIDHARTH DHIR

senior articled assistant

623 Points Joined June 2009

suppose a company declares bonus @ 1:1 and gives a record date say 10 march.

An investor A buys shares worth 10000 on 8 march....

Does this mean that the investor will go on to double his money on 10th March and on 11th march his portfolio value increased ??????

Replies (18)

santhosh

636 Points Joined January 2009

No it wont.. check this illus

	Before bonus	After Bonus

EAT	15000	13000	(2000 reduced for Bonus issue)
no of shares	200	400	( 1:1 bonus)
(200 Shares @ 10/ face value)

EPS	75	32.5
P/E	10	10	( P/E remains the same)
Price	750	325

Market Cap	150000	130000

SIDHARTH DHIR

senior articled assistant

623 Points Joined June 2009

WHAT IS EAT SANTOSH?

santhosh

636 Points Joined January 2009

EAT is Earnings after taxes...

CA Dhiraj Ramchandani

CA M. com

10823 Points Joined November 2008

Santhosh, brilliantly explained...

Hi dhir, its not like that way...

Whenever a company issues bonus issue, MPS of its share falls to the exact proportion to the bonus issue..

For e.g. in ur case, the bonus issue is 1:1, so the price will exactly fall by half the price of MPS on bonus date..

That means, if i've today 1000 shares whose MPS is Rs. 100 [my portfolio amounts to 1 Lac], after bonus i'll have 2000 shares of Rs 50 each [still my portfolio is of 1 Lac only].....

So, there is no change in the total capital of the person, its just the no. of shares changes

SIDHARTH DHIR

senior articled assistant

623 Points Joined June 2009

DOES THIS IMPLY THAT BOTH THESE TERMS (BONUS AND STOCK SPLIT) HAVE SAME MEANING?

THANKS DHIRAJ SIR AND SANTOSH SIR.

CA Dhiraj Ramchandani

CA M. com

10823 Points Joined November 2008

No no no no...

U r getting it wrong again dear...

Bonus is addition, that means something that is added..

While in stock split, there is no addition...

Let me tell u the difference between both of these

santhosh

636 Points Joined January 2009

Not really !

Stock Split is dividing say 100 shares of 10/ each to 20O Shares of Rs 5 each and reverse stock split is converting 100 shares of 10/each to 10 shares of Rs 100 each..

santhosh

636 Points Joined January 2009

But in USA they call bonus as Stock split

CA Dhiraj Ramchandani

CA M. com

10823 Points Joined November 2008

Bonus shares :

A company issues bonus shares by converting a portion of Shareholders' Fund into Share Capital. This is another way of rewarding the shareholders for investing in the company's business. To the extent the bonus shares are issued, the holder of shares is entitled to receive free shares from the company based on the current share holding. E.g. Say X is holding 100 shares in Company ABC Ltd. The company decides to issues bonus shares in the ratio 1:1 on Oct 15, 2009. On Oct 15, 2009, X will own 200 shares of ABC Ltd.

In case of issuance of bonus shares, the impact of such issuance is visible on its price. Exchanges usually announce a ex-date for trading securities on ex-benefit basis. On the ex-date prices are adjusted to reflect the impact of issuance of new shares.

E.g. In the above case, let us say that the stock price of one share of ABC Ltd was Rs. 1000 one day before the ex-date. Therefore on the ex-date the price of the shares would be adjusted to reflect increased capital on account of issuance of bonus shares.

The formula for adjusting share price is as under:

Ex- price = (Price of shares before ex-date X no. of shares)/no. of shares after issue of bonus shares

Therefore Ex-price = (1000 X 1) / (1 + 1) = 1000 / 2 = Rs. 500.

Stock Split :

Stock split is reduction in denomination (face value) of the shares. Shares in the past were issued in standard denominations such Rs. 10, Rs. 100, etc. Over many years with performance and growth, the share price of some of the companies has appreciated. E.g. Grasim has a face value of Rs. 10 however; the price of one share in Grasim is Rs. 2600. For small investor this may appear a little beyond his or her means to own the shares in Grasim. This problem of owning shares was more pronounced when securities were traded in lots of 50 shares and 100 shares.

Therefore to make appear the security price within the reach of small investors, the companies decide to split the stock denomination (face value). When stock denomination are split say from Rs. 10 to Re.1, the market price is adjusted in same proportion.

So if Grasim was to announce stock split from Rs. 10 to Re.1, the market price of the stock would get adjusted ( on ex-date) to Rs. 260 (say). Now the price of the security may appear affordable to a small investor. In a stock split, in the above example, if X is holding say 10 shares of Rs. 10 denomination before split would now hold 100 shares after split.

SIDHARTH DHIR

senior articled assistant

623 Points Joined June 2009

GOT IT SIR... THANKS

Sandeep Ladha

N.A

435 Points Joined November 2009

Santhosh Superbbb Calculation.........

Dhiraj Nice Xplanation........

But In BONUS nd STOCK SPLIT the portfolio value remain Same.......????

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37 Points Joined February 2010

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SIDHARTH DHIR

senior articled assistant

623 Points Joined June 2009

Originally posted by : sandeep
	Santhosh Superbbb Calculation......... Dhiraj Nice Xplanation........ But In BONUS nd STOCK SPLIT the portfolio value remain Same.......????