Bonus Shares Issue & Stock Split – #21 MASTER INVESTOR - YouTube

Friends, many times companies declare bonus issues.

And many times the stock is split

Now there is a lot of confusion in this. First, what is the difference between these two?

And second, are we getting any benefit from this, or is it just paper formality?

So we are going to clear this confusion in this video.

We are making this video a part of the Master Investors Series.

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In this video, we will understand the concept of stock split and bonus share with examples.

Let's see what happens to our investment.

If a stock gets split or a bonus share comes.

What impact does this have on the balance sheet?

There is a difference between the two, how the balance sheet is treated in a stock split.

And also how the balance sheet is treated in bonus shares.

Let us first understand the stock split If the stock split is announced

Let say 1:2 split, See what 1:2 means. That you have divided one into two parts.

That is, make it one by two,1:2 means that your one share is split Into 2 shares

If you had 100 shares, now it will be 200 shares.

so we'll call it,2 shares for every share held.

So this is very intuitive

This is understood quite easily.

Similarly, If there is a 1:5 split,

That is, one share got divided into 5.

How it will be treated in the balance sheet, we will also see soon.

We will call 1:5, 5 shares for every share held.

So here this concept became clear to us.

Now suppose let us take an example.

Let's say Stock is split into the ratio of 1:5.

That is, one share makes five shares.

So let's understand how our investment will be affected.

Suppose before the stock split

You had 100 shares of a company.

Let say it's the stock price was Rs 300

and the total value of your investment will be

100×300 equal Rs 30,000 Now it is split into 1:5

That means your 100 shares now they become 500 shares

So after splitting your shares will be 500.

Understand carefully

It is not that if your shares become 500

So your investment value will be 5 times

The share price you had will decrease by 5 times.

That is, it will be divided by 5

So here the share price will be ₹ 60, and your investment value will remain the same.

Why does any company split stock ?

The company feels that the price may have become too high as of today's date.

Not many people can afford it,

Because the value of a single share has become very high.

In such a case a stock split is considered. So if a share price becomes affordable

So its demand increases a little more. It may also happen that

It may start trading at Rs 62 or Rs 63 instead of Rs 60

Just because Its demand has increased.

However, theoretically, your investment value will remain Rs 30,000.

But practical can be a little incremental increase.

Now we will talk about the effect of stock split

So the first one we talked about is that the share price becomes affordable in the market.

That's why any company wants to do it.

It is generally considered to be positive sentiment in the market.

Because the company feels like it can show more growth

If the company is finding the price higher in today's date

That means the company thinks even if we reduce its price

Even after that, we will increase this price in the coming time.

That's why the market gives it a positive sentiment.

And for this reason, the liquidity also increases.

Demand also increases, you may see some incremental increase from this.

But if so, it is not confirmed.

Everything depends on the market conditions at that time.

Let us see what difference it makes in the balance sheet.

shareholders equity, which is on the side of the liability, the equity part

Before bonus,

Let say Your share capital is (10×1 crore shares)

Let's say the outstanding share of the company is 1 crore.

And the face value of each share

This Rs 10 value is written, this is the face value

What is face value?

The value at which the shares are issued to the promoters.

The initial value is called face value

I have made a detailed video on face value, book value, market value,

It is part of the Master Investor Series. you can watch it if you want.

How much is our share capital now? Rs 10×1 crore,

That is, the share capital is Rs 10 Crore

Let's assume the company has cash reserves and a surplus of Rs50 Crore

So the total shareholder's equity, That is the net worth of the company.

How much will it be, total it will be of Rs 60 crores.

This was before the bonus, What happens after the bonus is declared?

See, your share capital will remain as it is 10 crore

reserves will also remain Rs 50 crores, the total shareholder equity will also remain the same.

but what will be the difference

look here now your shares were worth 5 crores i.e. one share turned into five

Meaning 1 share was split into 5.

So your shares were done five times, that is Rs5 Crore

Your face value is divided by 5

This face value is now reduced to just ₹ 2.

Earlier it was ₹10.

So it's simple in a stock split,

The value of your shares becomes 1/5

Also, the face value becomes 1/5.

The number of shares increases the same number of times.

This is a simple concept of the stock split.

Let us now talk about the bonus share. Why does the company declare Bonus Shares?

And what is its concept? Before that let me tell you reverse stock split

It is a small concept, a reverse stock split is the exact opposite of a stock split, that is,

if a company says that we are doing a 50:1 reverse stock split,

so it means 50 shares will become one share, Suppose if you had 100 shares, now you have

Only 2 shares will be left, so basically you will get one share for every 50 shares held

Why does a company do this, and what is the sentiment in the market for a reverse stock split?

The company does this because the stock price has dropped significantly.

The company's stock may have become penny stock.

Maybe that stock has become of Rs1- Rs2,

So if the company wants to make the stock price reasonable, its value is good in the market.

So they do the reverse stock split, and

How does the market generally react to a reverse stock split?

This is a generally negative sentiment

Because the market feels that the company must have some problem,

Either it will be penny stock that's why the reverse stock split is happening.

Second, if the price of a company falls too low

So there could be a problem of delisting as well, maybe Seb try to delist it,

To avoid delisting, the company would go into reverse stock split several times.

But the market knows too, no investor is a fool

Hence, the sentiment of the reverse stock split is not considered good.

So we understood stock split and reverse stock split.

Now we also understand the concept of bonuses. See the meaning of bonus is

that you are getting the same thing in bonus, you are getting something extra.

So understand carefully, When we saw the 1:2 stock split it had a different meaning.

If 1:2 bonus share was declared,

it would have a different meaning.

understand carefully,

This one was considered to be 1 original share

Here is the figure which is being written back

this is your original share

I write here too.

This number of shares, your original share.

So you have one share and 1:1 bonus is declared

So that means one bonus share for every share held.

One bonus share, this share for every original share held

Now we will understand with one more example

Sometimes we can not understand properly by 1:1. So if 1:2 bonus comes

That means one bonus for every share 2 shares held.

This second part is original

It was the opposite in the stock split

The original share was the first one and that was being split

Here, the figure that is written at the last is the original share

And the one which is written before is the share which is being added

If you have two shares then the company is giving you a share as a bonus

If a 3:1 bonus is declared, that means if you have 1 share on today's date

Then you're getting 3 shares extra.

That means 3 shares for every share held

So you should understand this carefully

So we understood what is a bonus share

Now if any company has declared the bonus of 2:1

What benefit do we get as an investor

Before, we had 100 share

The share price was the same 300 Rs and the investment value is let's say 30000

So now the bonus is declared that means

We are getting 2 more shares with one share.

So 2+1 = 3

If we had 100 shares, then we will get 200 shares more

So now how much do we have? 100+200 this is the bonus

I will write also. This is a bonus.

So the total shares that we have are 300,(100+200)

What will happen to the share price?

The share price will become 1/3rd. Please pay attention we are talking theoretically

We will talk practically soon

Share Price will become 100 from 300 and your investment value will remain Rs 30,000 theoretically

So now what is the effect of the bonus issue

Firstly understand this, why does any company declare a bonus

Like generally the companies declare dividends

If in any year let's say the company doesn't want to declare dividends

So what will they do? They can declare a bonus

Because the money for the bonus will also come from the reserves

Here, the company is not asking for the additional money

Second, this stock is not splitting

That we have divided one share into two or three

Extra shares are being issued to you.

So if the extra shares are issued then obviously they have to find them from somewhere

They have to bring the money. From where that money will come. I will tell you soon

Generally when the bonus is issued then it is considered as a positive sentiment

Here, the company wants to make a share affordable

So it can declare bonus or split the stock too

So the positive sentiment here is that any company

Assume that it will see good growth in the future that's why it is declaring a bonus

Here also, this is the similarity with the stock split. The liquidity increases here

and the demand also increases. So it may trade the shares at 104, 105 instead of 100

If there is no other sentiment in the market

So practically whenever the is a bonus share issue is declared

There may be a slight increase in the share price due to the positive sentiment.

Now there is a difference in the balance sheet. It is a bit different from a stock split.

We take the example 2:1, suppose a bonus is declared.

Let's say there were shares worth one crore here earlier.

That is, there was one crore number of shares.

The face value was ₹10,

the share capital was Rs 10 crores

The reserves were Rs 50 crores.

Total Net Worth of Rs 60 crores

So what will be the after bonus?

share capital, Understand carefully.

shares are now Rs3 Crore,2 bonus was declared, so 1+2=3,

3 crore shares Of Rs 1 crore

Pay attention here face value is not changing The face value is 10, That is, the share capital has increased here.

The share capital of Rs 30 crores, So where did this 20 Crore come from?

This Rs20 Crore will go from our reserves, Pay attention here

Here now our reserves will be Rs 30 crores.

The total share equity will remain the same.

The net worth of the company is still Rs 60 crores.

So what could the company do from the reserves

The company could pay a dividend out of the reserve, The company has all these options.

what can the company do, they do not declare that dividend too.

The company can grow with this money,

The company can also declare the bonus.

And what else can the company do, Sometimes companies also do buyback.

We have also done a video on Buy Back Of Shares

You can also see that, this is part of the Master investors series.

So here the company is saying that instead of paying dividends we are giving a bonus

So this money comes from the reserves and gets added to the share capital.

The net worth of the company will not increase, As an investor, we are not going to make much difference.

We can only consider it as a positive sentiment

The company is looking at future growth.

If the company is declaring a bonus share

I think till now the concept must have been completely cleared,

Now let me tell you 1-2 more terms related to bonus share

Let us understand the timeline,

Suppose a company announces any bonus issue

declares a bonus issue,

A record date comes in it, it is important,

Announce date we assume, for example, let's say 5 September they announced

And they said the record date is October 16th

What is the meaning of recording it? -understand carefully

In your Demat account, there should be shares on the record date

Then only you will get bonus shares

Now one more thing to understand carefully, T+2 cycles applies in India.

That is if you executed a trade 2 days ago.

Only then the shares will come to your Demat account on October 16.

That is if you want bonus shares of any company.

So you should buy it by October 14 only

What does it mean,

Even if you buy it on October 15th

Even then you will not get the shares as a buyer

We call that X Bonus Date.

X Bonus means without bonus.

If you buy after 15 October or if you buy shares on 16 October

Then you will not get that bonus

The seller will get that bonus means the original owner

Because the shares are in his account. So x bonus means without bonus

So you will always see the x bonus date is also declared.

There is an x bonus dividend date

There is a date in the x bonus rights issue

The meaning of x is without.

The second term is cum bonus. Cum bonus means with bonus

This means if a person executes trade from 5 September to 14 October

Then that buyer will get bonus shares

But if he buys on 15 or 16 October then

Then he will not get bonus shares

The seller will get the bonus shares in that case.

Because till that time the shares will be in his Demat account

The person who will have the shares in his Demat account on the recorded data

Will get the bonus shares.

I hope the concept of stock split and bonus shares is clear to you

As we have talked about earlier that we have done some videos on the channel

But they were not part of the master investor series

And these videos are related to financial ratios. Now we have made these

a part of a master investor series. I have done their numbering.

Then you can watch that playlist or the series

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