Difference between Bonus and Stock Split
Reliance Industries went Ex-Bonus on Thursday 26th November 2009 and stock was trading close to 2200 on 25th November and next day opened at close to 1100. I was bombarded with so many questions in emails as well as in the article Reliance Bonus Issue and Dividend.
So let’s take each of them and try to clarify them.
Apart from the queries related to whether I would get bonus shares or not there were quite a few of other interesting questions and I would mention few.
- What is the difference between Bonus and Stock Split?
- Why Reliance Industries Fell by 50%?
- Should the bonus shares just mean I would get extra shares without prices changing from 2200 to 1100 odd?
And so on.
First understand what is Bonus Shares and Stock Split?
- Bonus
- Bonus shares is a very misleading term and there is no bonus when it comes to shareholder’s value since the increase in stock quantity is arithmetically neutralized by the proportionate fall in stock price but it is true that bonus issues are generally bullish for the share price in the near future.
There is no concept of bonus in many developed market and they term the bonus as stock split.
- Stock Split
- Stock split is reduction in denomination (face value) of the shares. Shares in IPO are issued in standard denominations of Rs. 10 but prices of such shares goes up by a margin which can be beyond the scope of retail buyers and so companies tend to decrease the face value by splitting the shares.
In India we still have face value variations but in more developed market all share have face value of unity (Re. 1). Now as there is no concept of face value in more developed market and split (bonus as we term here in India) is used to reduce the price of the shares. What we call a 1:1 bonus in India is actually 2 for 1 split in US.
Example
Say you own a company whose share price is 1000 and face value is 10. Your investor would need to pay a premium of 990 Rs (1000 Rs for a share of 10 face value) which can be a mental block for many small investors. So you decide to split i.e. you split the stock of face value 10 to face value of 1 and the price of your stock is now at 100 Rs and premium is 99 Rs. This is split. You are decreasing the face value or denomination from 10 to 1.
Say again after the split your price went up to 1000. (Yeah I know it’s too bullish 
). Now what? You cannot split the stock anymore. So now instead of doing a split you issue new shares. New shares are given to your investors but that does not mean your company grew by that many times overnight. Before split you had 100 floating shares in the market and now you decide to make it 1000 shares. So the price of each of your shares will fall to 100 from 1000 and now you will have 10 times more shares floated.
Short answer to all such questions is to remember that you cannot double your portfolio overnight which means if any company gives bonus shares that does not mean you would have the shares just added to your portfolio and share would be at the price before the bonus or split.
If you still have any questions post them in comments and I would be more than happy to clarify them.
How My Technical Analysis eBook Can Transform An Average Investor into A Market Analyst
If you're trying to make money from equity market, you should understand how the market works and not bet on your luck.
Technical analysis and chart pattern can revolutionize your understanding about the market and help you understand when is the right time to get into any stock and what should be your possible target for the stock.
My eBook helps you get equipped to understanding the market from practical point of view which means unlike many other technical analysis books my eBook does not explain all possible technicals and patterns that any student need to know.
In short I have explained technicals that I use when trading and investing in market.
Investing has changed in the last 5 years. It has not changed in terms of process – fundamental analysis is ...
Do you want to learn for some course or you want to learn to trade in the market? 
i have written a exam of NCFM in dealers module . sir i want to learn technical analysis but ...
Hi,
I am a newbie investor and i was looking to learn technical analysis but i saw your e-book looking forward ...
Hi,
I just started reading this book and one immediate feedback is about a correction that is probably needed. The National ...
Hii This is praksh mali from mumbai .still haveing douts on this chapter .could you provide more depth detail in same .And how one company and investor get benefit fronm bonus and spilt share .
prompt response would highly appreciate .
What kind of benefits you are concentrating on.
Dear sir,
Can u Tel me till what rate we can hold ORCHID CHEM stock and y?
Good stock if purchased in the fall. I think you can hold at any rate you think you are comfortable.
So whats the deal with November 25th pricing of Reliance Industries. Does that mean If I had 10 shares before now I would have 20 shares? If so when will they be alloacated to me/my account?
Thanks.
Regards,
Satya
Yes you would get 20 and it would be soon because I am still not sure about the date.
Thanks Shabbir. On a different note is Maruti @ 1580 a fair buy? I went through your write on the same sometime ago and I get a feeling that you think its not that highly priced. Please throw some light. Secondly I have 400 share of SesaGoa @ 122 should I book profit at any level? I am a long term invester. Thanks in advance.
Regards,
Satya
Looks like we have both same kind of investment interest and I also had Sesa Goa at close to 110 but I offloaded it close to 320 and I think you should take some profit if not all.
Regarding Maruti you should follow the strategy of accumulation over a period of small dips which means you decide how many units you would buy and distribute them into 4 to 5 transactions and buy each slot in a decline.
I had 200 PNBGilt shares. I sold 100 shares recently. Should I hold the remaining shares as there are rumers that it is going to merge with parent bank?
I do not track that stock and so would not be able to comment on it.
I am long term investor, building my portfolio for my grandchildren. Should I exit auto stock namely Ashok leyland 100 shares),Raunak Auto(100 shares),Sona steering(200shares) and Sundram fastners (130 shares) and invest in which sector/stock.The profit rangeing from 100 to 40%
I track none of them and so would not be able to comment
i bought 50 shares on 25th nov, since the stock went ex-bonus on 26th ,
my question is:
1. if i sell the 50 shares now then will i get the 50 more shares.
2. if i m not selling any shares and if i m getting the bonus shares, then how many shares will i get after bonus shares is credited.
since after split i should get another 50 so total is 100 and after bonus 1:1, i should get another 100, am i right???
so i should get a total of 200 shares after bonus is credited, am i right???
3.if i m selling 50 shares 2moro then will i get 150 shares more , if i m getting bonus????
Pls help me
Thanks in advance…
If you bought 50 you would get 50 more and no matter what you do now. Sale or hold. On 26th Opening day you had the share and you would get another 50 totaling 100.
hen why thr is 50 % dcrease i the sare price of reliance of which bous is givn?
if bonus i given than the rice hold not decrease?
Hello, this blog widens our knowledge on stock market. It offers a wise difference between bonus and stock split with right example.
hi.
merry XMAS sir
differentiation in b/w bunus issue and tock Split is good understood .
are you equity analyst???????? if yes plz suggest me how can i get in a good equity research company.. I am perusing my last sem of my MBA in finance..
I am just a personal blogger and not an analyst and read my disclaimer and about you may see what I do or who I am.
As my intro concern I am Akhilesh kumar final year student of MBA(finance) frm mumbai n want to get in equity anlystic firm.
so plz i am looking for ur help as a guide in this field..ur valuable input really help me to solve a lot of my doubts.
i saw ur disclaimer , i got my answer , i want to know techniques to track companies on what bases i could be assure that this company is good to invest..
There is nothing called techniques but balance sheets and earning
good explination
ril share is most non performing due to selfish attitude towards share holders i have lost faith in the company
Sandeep, Better late than never is all I can say
sir i invested in asian films and distribution 2000 share at .66 rs cost. now share is going on 7.00 rs but stock was spilt to 200 share it loss or profit for me
Ravindra, I am not able to get what you mean by split. Did you mean that you have 2000×200 shares or it is only 200.
Also your profit / loss would depend on your total spend which was 1320 and calculate what you get when you sale all your shares now and that will make you understand if you are making profit or loss.
Dear Sir,
I was impressed & got knowledge reading your article “Difference Between Bonus & stock splits.
Sir, I have follwoing some queries. Please try your best to solve them.
Most of the companies’ balance sheets and Profit & Loss accounts are manipulated with following.
1 Change in Finanacial Year
2 Extraordinary Items
3 Bonus shares
4 Stock splits
Please explain above said four points to be used to adjust balance sheets and Profit & Loss accounts.
Que: why do they need to adjust balance sheets and Profit & Loss accounts with above points ?
Que :How can we judge that companies balance sheets and Profit & Loss accounts are trust worthy ?
Anticipating your kind co-opration.
Thanks a lot.
Regards
Haresh Patel
Harsh, your question is so broad that it will be almost impossible for me to answer that in comments but my answer would be to make it look more profitable with the extent of leverage possible. I will suggest you read this book and that will give you idea about how balance sheets actually change and why.
sir i bought 2000 shares of asian films and distribution. at the rate of .66 rs /share. two years ago. after long time i hade came to know that in my DP account share are only 200 nos because of spilt of shares.so i want to know that today is cost of that share is 7 rs/share.is it good for me or not
Yes what is bad in this apart from the fact that your 1400 Rs is still at the same price after couple of years.
Should I buy Reliance Industries for long term investment at the current rate 950-970 per share.
Whhat other shares u suggest for long term investments.
I think if you have a very long term then only or else there are lot of other movers available in the market.
can i sell full quantity if share got spilt verynext day
if i hold 500 its goes 10to 1 it means i hav now 5000 can i sell them early next day when its goes ex spilt and what about in case of ex bonus can i sell total
Suraj, You can sell the 500 you have but the rest 4500 will take some time to come to your account and then only you can sell them.
dear shabbir sir ….hello
i bought 100 reliance petro shares in 2006,and @ the time of its merger with rel.ind.they were in brokers account and not in my demat. now after all this merger and split thing, i want to know
1-how many RIL shares ( and others if any) do i own,
2-how would i get them in my demat, i have mailed and written to the broker several times but to no avail.will it help if i contact reliance indust.with a copy of the cotract note.
kindly guide me. thanks a lot—- sunil
Sunil, Why dont you check your account to see how many you have and you should have 1 RIL share for every 16 RPL shares you had.
i checked my demat but there are no ril shares
Then contact your broker and if he does not respond then contact Karvy
and i guess for 100 rpl i should now have 6+6=12 ril shares (after bonus) right?
thanks once again Shabbir Sir
Should the bonus shares just mean I would get extra shares without prices changing from 2200 to 1100 odd? In any position Is this possible?????
No. It will become half always or else the owner will become twice as rich as he was before the split.
Thanks sir. but sir when reliance power ipo came in the market the price of the share crash and the holder were given the bonus i guess in 3:1 ratio in this case the price will fall propotionately??????
and also sir i am a student interested in share trading and investment pls can you recommend me some book which give complete knowledge about how to choose in which company i should invest and give information about derivative and capital market….. thanks in advance
Yes it went down and check out my recent post on how to find best stocks for yourself – http://shabbir.in/find-multibagger-stocks/
sensex currently trades at a p/e of nearly 17 times on a trailing four quarter basis .
what does this means?
It means sensex is trading at 17 times the earnings of the listed companies.
Hi Shabbir,
I hold 100 of Ashok Leyland worth INR4620
After the bonus of 1:1 :-
Firstly, will that amount become double?
Secondly, how much time does it take for the share price to become half(go down)? Does it become half immediately or goes down gradually over a period of time?
Lastly, as after bonus the number of shares in my portfolio would become 200, when I sell all of them(200 shares)@ say Rs.50 per share market price, how much amount will be credited in my account.
Thanks in advance.
B/Regards
Vikram
Vikram, the amount cannot double at any given point of time or else the wealth of the promoter can double overnight and that would have been used by every management.
When the stock issues bonus or split, the share price goes down immediately.
Last you will not be able to sell 200 shares at price of 50 but at the price of 25 and so the amount credited in your account will be 25×200 less brokerage.