Let’s say “I got one months salary as Bonus” means, we really get one month extra salary. But in Equity, it seems like it has different meaning.
In the past few months, I have seen several companies such as Powergrid, IEX and Infibeam had announced Bonus shares. What is puzzling to me is that following Ex Bonus date, stock price get half (1:) or 1/3 (2:1) depending on quantity of Bonus. Let me give you recent example, Infibeam has announced 1:1 Bonus. Day before Ex Date, it closed at 44.75. But on Ex Date it become half , i.e 22.3. Indeed Zerodha sent email saying that P&L for this stock will be artificially reduced to 50%. So let’s say we receive Bonus share after month. Then worth of your total holding will be same as what you bought (because earlier it was down by 50%, and after you get 1:1 bonus , it will be like original). Its crazy! How can it become Bonus !
In arithmetic terms, if you have bought 1000 Rs stock , after you get 1:1 bonus, its total value should be 2000 Rs.
Can any one of you explain me how it works in Equity market?
Thanks for the link. If bonus share are only increasing total number of shares without increasing fund value, they should have called it as “Split”. And if aim of bonus is to “encourage retail participation and increase their equity base”, they should have called it as Split. Why on this plant earth they call Bonus !
Well for an average investor, bonus and split will look one and the same, as number of shares increases, while keeping overall value same, but from accounting perspective there is a difference.
For bonus issue, company uses it free reserves to transfer to equity. So in effect new equity capital is generated and distributed to shareholders by company. Why this are called as free shares? Because cost of aquisition of these bonus share is considered 0. (This is important only from taxation)
You can use this to delay the taxation or book some losses
This is true but only from face value point of view. So earlier if you had one share of FV rs. 10, after 1:1 bonus you will have 2 shares of FV rs. 10
However since this is just accounting entry there is no material change in business, so overall market value remains same and market price halves.
Still bonus is considered as positive because company is transfering its reserves to equity and sending out a message that in long term business is expected to do well.
Split is nothing but just splitting face value of shares. So If you had 1 share of FV 10, you get 2 shares of FV 5. Even cost of aquisition halves so there is no change from taxation perspective.