Basics of stock market: Dividend, stock split, bonus shares, rights issue, buyback | Neha Nagar - YouTube

Of which field is the stock market the radish?

Why can't we do it? Let's see.

Reliance announces the right issue.

Right issue?

Asha Motors declared a stock split.

Stock split?

K announced a buyback of shares.

I feel I won't be able to do it.

Bonus issue, Rights issue, Dividend, Buyback.

If you don't understand these terms then the video is for you.

Hello everyone, I am Neha Nagar.

In this video, we will talk about corporate actions.

What are corporate actions?

How do they impact the share price of a company?

Let's start the video.

Do you remember we studied Factors of Production in class 9?

The products and services reaching us, there are 4 important factors or inputs to its production.

First is Land.

The return to Land is Rent.

Second is Labour.

The return to Labour is salary and wages.

Third is Capital.

The return to Capital is Interest.

Fourth is Entrepreneurship.

The return to Entrepreneur is Profit.

You must be thinking we didn't learn about it. But it's okay.

Groww will teach you.

Watch this video till the end.

Is the entrepreneur receiving all the profit?

No, it's not true.

All the profits earned by a company are not given to entrepreneurs and shareholders.

They receive a small portion if the company agrees.

When a company earns profit, a decision is made as to what to do with the profits?

The company has many options.

First, to pay off debt with profits.

Second, use profits for expansion.

Third, it can keep it as cash reserves.

Forth, it can share its profits with its shareholders as dividends.

When a company takes an action like that that affects shareholders, is called corporate action.

Like, Change in the company's structure.

Change in the name.

Amalgamation, acquisition, or merger.

These are initiated by the Board of directors and approved by shareholders.

The most popular among these corporate actions is Dividends.

You must have heard the name.

Let's suppose the company has earned a profit of 10lacs.

Now what to do of this profit?

The company can repay debt, expand or keep it for cash reserves.

Or it can pay a part of it to its shareholders.

The part of the profit given to shareholders is called the dividend.

This is not compulsory, the company can decide when to pay, how to pay, and how many times to pay.

If the company is paying dividends, it will come directly to your account, you don't have to do anything.

This is distributed equally on the basis of per share.

Why do companies give dividends?

It wants to reward and make shareholders happy.

When the shareholders know that they are going to receive dividends, their demand increases.

If its demand increase, its price will also increase.

That share comes in the news.

It attracts new shareholders and thus increases retail participation.

So the impact of dividends is positive but not necessarily.

And the dividend-paying stock is not necessarily to be a good stock.

I made a video with Groww, Red Flags, you can check that also.

A dividend is 2 types.

First- Interim dividend- paid during the financial year.

Second- Final dividend- paid at the end of the year.

There are more 2 terms associated with Dividends.

1. Dividend Yield- the percentage of (market price) dividend paid by the company.

If the market price is Rs.100 per share. Dividend is Rs.10 per share.

Dividend yield is 10%.

Whenever we pick stocks, the dividend yield is also checked.

2. Dividend payout ratio- the percentage of earnings per share.

Suppose a company has earned 10 lacs and shareholders are 4.

Earnings per share will be 2.5 lacs.

Dividend payout ratio can be 50% or 30% of EPS.

This is how the Dividend payout ratio is calculated.

There are a few important dates to understand.

1. Declaration date- the date on which dividend is announced by a company.

2. Ex-dividend date- the date before which shares should be bought.

This is because for shares to come in our Demat account, it takes D+2 days.

So after 2-3 days, comes the Record date

3. Record date- company checks the shareholders' list and if your name is there then you will get the dividend.

4. Payment date- date on which dividend is received.

You don't have to do anything, you will get the dividend directly in your bank account.

How to tax the dividend?

The tax will be applied as per your tax slab.

If the dividend is less than 5000, then No TDS.

That is, the company won't cut TDS before giving it to you.

If the dividend is more than 5000, then the company will cut 10% TDS before giving it to you.

When you file the ITR, this amount can be adjusted, as suggested by your CA.

The next corporate action is BuyBack of shares.

When a company's cash reserves increase, the company can buy its shares back from the public.

After purchasing these outstanding shares, the shares in the market will reduce.

Like 10 lacs is the earnings, with 4 shareholders so EPS is 2.5L

If there are 2 shareholders, then EPS will be 5L

EPS will increase in case of buyback.

Why do companies buy back their shares?

1. With more shares in the market, there's a risk of takeover.

2. The company considers its shares undervalued and may increase in the future.

3. The company may see growth potential

In such situations, the news is spread about undervaluation, growth, etc, which makes the price rise.

Buyback is of 2 types.

1. Tender- You can give a request to the company about your willingness to give your shares, then the company will buy at a premium.

Suppose the market price is Rs.100 then maybe the company will buy at Rs.102 from you.

2. Open market offer- the company buys shares from you in the open market.

The third corporate action is the Rights issue.

This is when a company offers its existing shareholders to buy shares at a discounted rate.

If the market price is Rs.100, the company may ask you to buy at Rs.90.

This is a Rights issue.

There's a concept here Right Ratio.

If the company says its right ratio is 1:4, this means you can buy 1 share extra on the purchase of 4 shares.

Why do companies provide Rights issues?

This is due to fundraising, this is the best and simplest method.

There are not many formalities like in FPO.

FPO requires a lot of formalities.

So rights issue is the easiest way to raise funds.

What's the impact?

As the company is giving discounted shares, negativity will spread in the market

And as the supply has increased in the market, the share price may go down.

The next corporate action is a Stock split.

Did you know, Warren Buffet's share, Berkshire, is the world's most expensive share.

1 share price is more than 3 crores.

In India, the MRF share price is around 74,000.

The price doesn't determine whether a company is bad or good.

This is checked via fundamentals.

If a share price is so high, then it's an entry barrier for shareholders.

When the price of a company increases a lot, the company splits it.

It means it will increase the number of shares and the price also drop.

But market value doesn't reduce, the market cap remains the same.

Like MRF share price is 74,000.

If the company declares a stock split of 10:1, 1 share will become 10 shares.

1 share will become Rs.7400

The price will drop from 74,000 to 7.400.

This will enable retail investors to buy more.

This will enhance retail participation, liquidity will increase with more buy-sell

This will increase the demand for the shares so we can see the upside movement of the share price.

The fifth corporate action is the Bonus issue.

When the company wants to reward its shareholders but doesn't have cash, then it issues bonuses.

This is a non-cash dividend.

Suppose a company is issuing a bonus of 2:1

For 1 existing share, you will get 2 shares which makes a total of 3 shares.

Your shares increase but the value will remain the same.

The market cap will remain the same but the number of shares will increase.

The shares will become affordable and liquidity will increase.

This has a positive impact but the share price remains the same.

The difference between stock split and bonus issue is that

In the stock split- the company doesn't issue new shares In bonus issue- it issues new shares.

The dates explained in the dividend is used in all corporate actions.

1. Declaration date- the date on which dividend is announced by a company.

2. Ex-dividend date- the date before which shares should be bought.

3. Record date- company checks the shareholders' list

4. Payment date- date on which dividend is received.

There are more corporate actions like amalgamation, merger, etc which we will discuss in some other video.

Do comment and tell us how you liked this video.

We will soon meet in some other video.

Till then Keep Learning and Keep Earning.