Stock splits and bonuses are two common corporate actions that investors get confused with.
In this article, we take a look at stock splits and bonuses and how these two corporate impact your holdings and the share prices.
Before we dive into what a stock split and a bonus issue are, it’s important to understand two dates: the Record date and the Ex-date. These dates determine your eligibility for any corporate action.
The record date is the cut-off date on or before which you need to have the shares in your demat to be eligible for the benefits of splits and bonuses.
Ex-Date is usually one or two business days before the record date. You’ll be eligible for the benefit from the corporate action if you buy the stock 1 day before the ex-date. Since the settlement cycle of shares is T+2 in India, the stocks will hit your demat by the record date.
In a stock split, a company increases the number of shares by reducing the face value of the stock. Companies split shares to increase the stock’s liquidity since the stock price reduces after the split.
What does face value mean?
Face value is the nominal value of a company’s share as listed in its books and share certificates. The current price is what you see on Kite.
Let’s say you had a stock with a face value of ₹10 and a price of ₹500. If there’s a split in the ratio of 2:1, the face value will become ₹5, and the price will drop to ₹250 on the ex-date of the split.
If you purchased 1 share at ₹500 with a face value of ₹10 before the split, you would now own 2 shares at face value of ₹5 at an average price of ₹250 per share after the split. More on stock splits here.
The split shares are credited to your demat account within two working days for the record date.
A bonus issue is the distribution of free shares by the company to the existing shareholders. The face value of shares does not change in a bonus issue. Since bonus shares are free, they’re issued at ₹0.
You hold 10 shares of XYZ at ₹12 each. If the company announces a 2:1 bonus, then, for every 1 share, you will receive 2 shares for free. In this case, you’ll receive 20 shares for free. Your average buy price will then change to ₹4 per share. Likewise, if the stock price was trading at ₹60, the price of the stock on the ex-date will adjust to ₹20. You can learn more on bonus issues here.
Bonus shares can take up to 15 days from the record date to be credited to your demat.
Why does it take time for bonus and split shares to get credited in the Demat account?
Whenever a company announces a bonus or split, it must validate the shareholders’ eligibility for the corporate action benefit. For this, the company fixes a record date; anyone holding shares as of the record date is eligible for the corporate action benefit; hence, it takes time for the credit of bonus and split shares.
To learn more about what corporate actions are and how they affect your holdings, refer to this video from the Varsity video series 
