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.
