What is Ex-bonus? What is Stock Split? What is the difference between Bonus and Stock Split? Why people prefer buying shares before bonus?
Is there any difference between Bonus and Stock Split? The answer is Yes. As retail investors, we should know the key difference and how they can impact our investment.
So today, I will share the three key differences between bonus and stock split. Further, I will explain the same with an example. Then, I will share why the stock price skyrockets when a company issues a bonus.
So without much ado, let’s begin.
What is Bonus and Stock Split?
When a company announces a 1:1 bonus or 1:1 stock split, the share price halves, and you get twice the number of shares.
So per se, there seems no difference, but there is a huge difference. First, let us understand what is Bonus Shares and Stock Split.
Bonus
Bonus shares means the company is issueing new shares to its existing shareholders using the companies reserves or cash in the books. The increase in stock quantity is arithmetically neutralized by the proportionate fall in stock price on the day when the company goes ex-bonus.
Stock Split
Stock split is reduction in face value of each share. Shares at the time of formation of a company are issued in standard denominations of Rs. 10. However, prices of such shares go up and company may decide to reduce the price by making the face value of each share lower. In the market companies split if the share price becomes too high for retail investors. So companies split the shares by decreasing the face value of each share with a split. The face value of each share of Rs. 10 when split for 1:1 will become a face value of Rs. 5 each.
In India, we have a face value of Rs. 10 and then as the stock splits. However, in many developed markets, all shares have a face value of unity (Re. 1). As everything has the same face value of 1, there is no concept of split. So everything is a bonus which is termed as split there. What we term as a 1:1 bonus in India is a 2-for-1 split in the US.
Difference between Bonus and Stock Split for Retail investors?
When a company announces a 1:1 bonus or 1:1 stock split, the share price halves, and you get twice the number of shares.
As an investor, we think both are the same. However, three main differences can impact a retail investor. So let’s understand them.
The Purchase Date
In case of a split, the company is changing the face value of a share. The share face value change has impacted the price and the number of shares outstanding.
So for an investor, there is no change in the purchase date.
However, bonuses are new shares issued to existing shareholders.
So it is treated as if you purchased new shares on the ex-bonus day for free.
So old shares’ purchase date remains the same, and the new shares’ purchase date differs.
The Purchase Price
In case of a split, the company is changing the face value of a share.
So for an investor, there is a change in the original purchase price.
So for a 1:1 stock split, the purchase price for the share reduces to half.
However, bonuses are new shares issued to existing shareholders. It is to be treated as if you purchased new shares on the ex-bonus day for free.
So for bonus shares, the purchase price of old shares remains the same, and the newly issued bonus share is to be treated as purchased at ₹0.
Share Capital and Face Value
In a stock split, the face value changes, and there is no change in share capital.
However, in the case of a bonus, the face value remains the same, and there is an increase in the share capital.
Why Stock Price Rockets After Declaring Bonus?
When a company announces a 1:1 bonus or 1:1 stock split, the share price halves, and you get twice the number of shares.
So perse, there seems no difference for traders and investors. However, there is one reason why the stock price increases considerably when a company declares a bonus.
Now we know that in the case of a bonus, the cost price and the purchase date of the original share remain the same.
So if an investor receives new shares and the currently traded price of the old share reduces, and if he uses the FIFO method of accounting, he can sell the previously purchased shares and incur nominal tax.
Now investors can free up the invested capital, which is one of the main reasons many new investors want to be part of the company that declares a bonus.
So the stock price increases considerably.
Final Thoughts
I don’t think one should buy into a company only because it is issuing bonus shares.
The FSN E-Commerce Ventures, known as Nykaa, had announced a bonus ratio of 5:1. It was done just before the IPO lock-in ended for large investors.
It was primarily done so that investors will receive the ex-bonus shares late and so they cannot sell them on the day lock-in opens.
Moreover, newly issued shares will have higher tax as STCG is 15% and LTCG is 10%, so investors will want to hold the newly issued shares.
However, it wasn’t taken very positively. The ex-bonus date was on November 10, 2022.
Everything in the market has to be taken with a pinch of salt.
I am really very confused regarding the current discussion of US Fed tappering …now the question arise what is tappering..i searched a lot ant it on various website but however the language used was extremely complicated so pls can u give me a brief explanation ant it
Neel read this
I bought TCS 2 shares on 21-04-2008, 5 shares on 24-11-2008 & 5 shares on 05-08-2009. How many shares should I have now? I did not follow the split, bonus, etc. Can you help explain – it will be very useful. Other question is if there is a bonus 1:1, then on the record date, I will get equal number of shares at 0 cost. If there is a face value split from Rs. 10 to Rs. 2, then will I get 5 times the number of shares at 0 cost on record date? Would appreciate your comments. Thanks.
You have to keep tracks of all those split and bonuses as well as dividend. Tough for anybody else to track those for you.
I had bought 100shares of TELCO @ Rs 820 in 11 Aug 11. In sept the Teco shares were split 4 :1. FV Rs 10: FV Rs 2. How does it affect my investment .
Nothing and now you have 4 times more shares and 1/4th the price.
Thank you Mr.Shabbir. I will write to the intermediate broker and see.
Thanks for the help.
Regards,
Giri
Dear Mr.Shabbir,
I have one issue here.
I held 18 shares of SYMPHONY (NSE:SYMPHONY). 5:1 stock split was done recently. Without being aware of the ex-split date, I sold 3 shares on the ex-split date. The remaining number of shares in my account was 15. The sale transaction has happened at the ex-split price. Then the bonus shares were credited to my account. The total no. of shares in my account now is 15 * 5 = 75. That means the 3 shares which I sold (were bought at pre-split price, but sold at ex-split price, which is huge loss). I was expecting that for these 3 shares (deemed to be 3 * 5= 15 shares after split), since they were sold
at ex-split price, the remaining 12 (3*5-3) would be credited to my account, but it was not to be. Am I right? Have I suffered loss?
Regards,
Giri
Giri, in any case you should not be incurring a loss because record date is after trading hours and if you have less shares credited into your account you should be asking the intermediate broker (remember not your broker) for Symphony.
What kind of companies opt for bonus shares and which companies prefer stock split?And how will it impact the companies and their market price?
Hi Roshni, there is no general rule like these type of company do split and others do bonus.
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.
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.
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/
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.
and i guess for 100 rpl i should now have 6+6=12 ril shares (after bonus) right?
thanks once again Shabbir Sir
i checked my demat but there are no ril shares
Then contact your broker and if he does not respond then contact Karvy
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.
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.
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.
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.
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 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.
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
good explination
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
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.
Hello, this blog widens our knowledge on stock market. It offers a wise difference between bonus and stock split with right example.
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?
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.
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 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.
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.
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.
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.