Bonus Issue And Stock Split
Corporate action has a lot of impact on how the share prices will fluctuate. So suppose that company declares dividends then the stock price drop to the extent of the amount that the dividend is paid. The reason why the stock drops to this price is that the money now does not belong to the company. You can see this price drop on the ex-dividend date.
The company can choose to pay the dividend on any day in the financial year and this is known as the interim dividend. When the company pays a dividend at the financial year end then this is known as the financial divided.
The bonus issue is an award that the company gives to its shareholders. This is a stock dividend and the bonus is issued from the company reserves. The shareholders get free shares against the number of shares that they currently have. The shares are allotted in a fixed ratio.
If the company has allotted shares as 2: 1 then this means that the existing shareholders will get 2 shares for every single share that they own. This is given at no extra price. The bonus shares will increase the total share value of the shareholder but the value of his investment will stay the same.
The companies do this in order to encourage the retail investors to invest in the company. This is particularly done by companies that have a high share price and this makes it difficult for the new investors to buy the higher priced shares. When the company gives off bonus shares, then the number of outstanding shares of the company increases. But the value of each of the share that the shareholder holds decreases. This means that the face value of the shares stays the same.
The stock spilled is something that happens on a regular basis and this means that the stock that you own gets spilled.
When the company does a stock split then each shareholder will own a number of shares but the market capitalization of the company stays the same and so is the investment value. The method is the same as issuing bonus share. The stock split is done to encourage more participants to invest in the stocks. Retail investors now buy the shares because its value has decreased and so it can be bought by those who are not ready to pay a lot for each share, which they had to earlier. Read more about QProfit System.