Skip to main content

Investment Strategy: When a Stock split of Bonus comes your way...

Use the opportunity to take a call if you want to stay invested or exit

Arising stock market is a perfect time for companies to reward their investors, as well as increase the liquidity of the scrip. It is done in two ways, a stock split or issuing a bonus.

The former increases the shares outstanding, allowing more investors to participate., when companies feel the stock price has gone out of reach of most retail investors, they opt for a stock split. Making the stock affordable and widely held, and increasing the liquidity. The latter move asserts the company will be able to service a larger equity base. A bonus issue is used to induce confidence in investors about the company, as it sends out a signal that the company is capable of servicing a large capital base through dividend payouts over a long term.

The result, though, is the same: The price of the share gets adjusted and the earnings per share comes down commensurately.

Data compiled shows 57 stock splits and 58 bonus issues since April. In the corresponding period last year, there were 38 stock splits and 30 bonus issues, when the Sensex was languishing at 9,000-levels. During the boom period of April-October 2007, there were 59 stock splits and 66 bonus issues.

A stock split is a re-proportioning of the stock in a ratio determined by the company. For instance, if a company decides to split its stock 2:1, every share gets divided in two equal parts. So, if the price of the stock prior to the split was '120, it would now be '60 per share. This also results in a dilution of the face value of the stock in equal proportion.

A bonus issue, on the other hand, does not affect the face value of the stock. Existing shareholders get additional shares, in the ratio declared. If a company declares a 1:2 bonus, for every two shares you hold, you will be awarded a bonus share. Price-wise, a bonus issue and stock split have a similar impact. But a bonus issue lets you benefit from higher dividend payouts, as these are given as a percentage of the face value, which is not impacted. While stock splits and bonus issues are age-old concepts,

Here are some opportunities in such situations:

Book profits on select stocks: In the past six months, most of the split and bonus activity has been concentrated in the mid-cap and small-cap space.

After a stock split, the price of the stock is perceived to be cheaper. As a result, they may move fast and give an exit opportunity.

Diversification: Bonus issues and stock splits give investors with a limited appetite a chance to exit certain stocks partially and diversify their portfolios. Especially since they can purchase good stocks at a cheaper price. Take HDFC, which split its stocks 5:1 in August. Prior to the split, the stock was trading at '2,984.70 on the Bombay Stock Exchange. After the split, the stock opened at '612, closing at 692 on Friday. Now, small investors can hold some portion of HDFC in their portfolio, while creating room for additional stocks.

Purchase before the record date:

Before issuing bonus shares, companies fix on the record date. If you are a shareholder of the company on that date, you would be eligible and earn higher dividends in the long run.

A word of caution: Retail investors should take such buying decisions only after checking the company's fundamentals and not based on some rumour or tip.

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

What are Tax savings Bank Fixed Deposits?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   These are a special type of bank fixed deposits, of five-year tenure, which allow you to have tax benefits for investments of up to Rs 1 lakh per person per financial year. Investments in these FDs give tax benefits under 80C of the Income Tax act. These are not very liquid investments because the money is locked-in for five years. One also has the option to continue the FD for another five years after the lock-in ends. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax ...

Good time to invest in Infrastructure Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now