Tuesday, February 2, 2010

What is the difference between splitting of shares and issue of bonus shares?

In both the cases the share price gets reduced in the same ratio.What is the difference between splitting of shares and issue of bonus shares?
Split of shares and Issue of bonus share are entirely different things and both have no relation to each other. In fact whenever market price of a share goes up to more high, normally company reduces the face value by way of splitting the share. Resultantly investor gets more no. of shares with less face value. Finally his holdings got uneffected. Suppose you have 100 shares of ABC Ltd. with a FV of rs.10 and company decides to reduce fv to rs.2 , now you will have ( 10/2 = 5 ; 5*100 = 500 ) 500 shares. so, earlier your your investment was of rs.1000 ( 100 shares @ rs.10 face value ), still after split your investment remained same of rs.1000 ( 500 shares of face value of rs.2)And market price corrects itself accordingly.


Now Bonus -- Whenever a company has surplus fund in Reserve and Surplus a/c and co. is in need of capital, company transfer required fund in capital a/c and allots shares to existing shareholder without asking for fresh money. Again shareholders no. of shares increses in ratio of holding and bonus. And so market corrects itself accordingly.


But market price after split and after bonus does not get reduced in the same ratio. Reduction of market price entirely depends upon the ratio of split and ratio of bonus issue.What is the difference between splitting of shares and issue of bonus shares?
Splitting of shares and Bonus are theoritically same





A stock split involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate.





A typical example is a 2-for-1 stock split. A company will announce that it's splitting its stock 2-for-1 in one month. One month from that date, the company's shares (having traded the day before at, say, Rs.30) will now be trading at half the price from the previous day (so they'll open at Rs.15). The company, which had 10 million shares outstanding, now consequently has 20 million shares outstanding. The price has been halved in order to accomodate a doubling of the share total.





3 Reasons of a company to do a stock split (bonus)





First, as a stock price skyrockets, some people will be psychologically unwilling to pay that ';high price'; so a stock split brings the shares down to a more ';attractive'; level. Again, the intrinsic value has NOT changed, but the psychological effects may help the stock.





Second, a stock split generally occurs in the face of new highs for the stock. Thus, it's an event dripping with positive connotations and associations. . . it's makes bulls snort and roar to suddenly have ';twice as many shares'; as they started with, for example.





Third, and final, with lower-priced shares, a stock's LIQUIDITY increases, often reducing the BID/ASK SPREAD and making it easier to trade.
A Bonus share is issued by capitalizing the reserves the company has built. This means that the total issued capital of the company increases. For eg. if a company has Rs. 1 lac as issued capital (10000 shares of Rs. 10 each) and issues a 1:1 bonus, the total issued capital of the company increases to Rs. 2 lacs (20000 shares of Rs. 10 each). This will mean that the EPS of the company comes down to half of what it was earlier as the issued capital is doubled. The market will have 20000 shares of Rs. 10 each





But, in a split of shares, the existing capital of the company remains the same and the face value of each share is reduced. For eg. if a company having an issued capital of Rs. 1 lac (10000 shares @ Rs. 10 each) is split to Rs. 5 shares the capital remains as Rs. 1 lac however will have 20000 shares of Rs. 5 each instead of 10000 shares of Rs.10 each.





Trust this clarifies the difference





Fundu Vishy - Your 'Mutual' Friend


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I blog @ http://blog.powermf.com

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