Stock split or bonus issues mean little to long-term investors as they do not change fundamentals
STOCK split is a corporate action that increases the number of a company's shares in the market by dividing each share into a smaller denomination. For example, a stock with a face value of 10 can be split into 10 shares of face value 1 each. The division brings in a proportionate fall in the stock price. If a stock is split from a face value of 10 to a face value of 1, then the stock, which pre-split quoted at 500, will post-split quote at 50.
Stock splits improve the liquidity in the stock market, as the number of shares go up. They also ensure that the stock becomes psychologically accessible to small investors. A small investor may not buy a stock when it is quoting at 500, but will go for it if he sees a price tag of 50. Improved liquidity in the market and accessibility sometimes drives the prices upwards in the short run. But there is no fundamental change in the underlying business and fortunes of a company. Stock splits are like cutting a cake into pieces of equal size. Hence, it means very little for long-term investors.
Bonus is a corporate action where reserves are converted into equity capital. Depending on the ratio, shareholders see additional shares credited to their account. For example, if you hear news of 1:2 bonus shares from a company, you will receive one share for every two shares held in that company. Of course, as the number of shares increase, the price dwindles. If in the above example of 1:2 bonus, the stock prior to bonus quotes (cum-bonus) at 300, after factoring in the bonus (ex-bonus), the price will drop to 200.
Bonus does not change business fundamentals and there is no need to act if you are a long-term investor. In both bonus and stock split, there is no cash handed over to investors.
