Prajna Capital - An Investment Guide

Stock split is the process of splitting shares with high face value into shares of a lower face value. It’s like getting an Rs.20 note changed for two Rs.10 notes. The value changes of neither note nor splitted stock. Effect of stock split A stock split increases the number of shares in a public company. The price is adjusted such that the market capitalization of the company almost remains same. Why stock split is done? 1) Companies usually split their stock when they think the price of their stock exceeds the amount smaller investors would be willing to pay. “It is aimed at making the stock more affordable and liquid from retail investors’ point of view.” 2) Generally, there are more buyers and sellers of shares trading at Rs.100 than say, Rs.400, as retail shareholders may find low-price stocks to be better bargains. Stock splits are usually initiated after a huge run-up in the share. This run-up may be linked to the performance of the stock. 3) The company may declare such splits i...

An issue of shares made by a company free of charge to existing shareholders. Also called bonus issue. An issue of free shares distributed pro rata to existing stockholders instead of a dividend. An offer of free additional shares to existing shareholders, a company may decide to distribute further shares as an alternative to increasing the dividend payout. Also known as a " scrip issue " or " capitalization issue ". New shares are issued to shareholders in proportion to their holdings. For example, the company may give one bonus share for every five shares held. Ideally, the share price drops the same ratio of bonus issued. For instance, if the company is giving one new share for each four shares own by the shareholders, the share price will drop by 20%. In fact bonus issue is nothing but a split … however accounting is done on different perspective.

Certainly, there are just so many factors affecting share prices. For example, high oil prices, interest rates, GDP and CPI to name few. However, many beginners are focusing too much on the external factors than what can happen from the accounting perspective. They can easily get frustrated from their own ignorance. Therefore, before you think of getting cheated next time, spend time to read this article very carefully. 1) Dividend Effect I love dividend as much as you do, but apparently, it does not comes for free. Simply because, the share price drops in the same value as the dividend paid after the ex-date. For instance, if Wal-Mart Stores Inc. decided to distribute $1 per share as dividend to its shareholders, its share price will generally drops from $49 to $48 per share after the ex-date. So, do not comment so much in the future if the stock price drops after the dividend payout, because you took the money away already. 2) Bonus Issue Bonus issue is additional shares given by the...

THE Reliance Power bonus issue is finally out and ex-bonus date is also out, its 28 May. The company declared a 3:5 ratio giving three extra shares for every five shares held by a shareholder. These shares were issued to only non-promoter shareholders. The record date for the issue is still to be declared by the stock exchange. What is a bonus issue? Any company, which has excess reserves that it may have build by retaining part of its profit over the years, may decide to convert some amount into its share capital by issuing bonus shares. This doesn’t change the market value of the company. It is one of the ways, in which reserves of the company get capitalized. In case of Reliance Power, the company is converting its share premium reserves into bonus. What is bonus ratio? New shares are issued in the proportion of their holdings. If the bonus ratio is 1:2, for every two shares held by the shareholder, he will get one extra share. This means, if someone was holding 100 shares of a comp...