hey friends as an investor it is very
important to understand how the stock
market works and if you are someone who
has recently started investing in the
stock market then you might have come
across various corporate decision like
your stock split bonus issue or right
issue now it gets very confusing for
retail investors to understand the
impact of each decision hence in this
video we'll try to simplify three key
corporate events that is your stock
split bonus issue and right issue and
try to understand why companies take
these decisions and its impact on the
share price of the company all right
let's get started
in simple language stock split is a
process where the company increases the
total number of issued shares by keeping
the market cap or valuation same here
the market cap of the company is
calculated by multiplying total share of
the company with the share price now the
question is when the company increases
the total number of issued share then
ideally the market cap should also
increase isn't it and if increasing the
total share was that easy then every
company would keep on increasing the
total number of issued share to increase
the market cap
so here is a catch when there is a stock
split there is an increase in total
number of issued share but at the same
time the stock price also decreases in
the equal proportion hence there is no
change in the market cap of the company
let me give you an example let's say a
company has a total number of share as
20 crore and its share price is rupees
2500
in that case its market cap would be
twenty into two thousand five hundred
that is rupees fifty thousand crore
let's say company decides to split its
stock into ones to five it means its
total number of shares would multiply by
five so total share would become 20 into
five that is hundred crore at the same
time the share price would get divided
by five so the new share price would
become two thousand five hundred divided
by five that is rupees five hundred in
that case market cap would be calculated
as total issued share that is 100 crore
multiplied by new share price after the
split which is rupees 500 so the market
cap would be equal to 100 into 500 that
is rupees 50 000 crore if you observe
there's no change in the market cap it
is just that there's an increase in
total issued share and fall in stock
price in the same proportion
i hope now you understand what is a
stock split now there are two key
questions on stock split
first is why would a company go for a
stock split and second is how does the
stock split impact the profit of the
existing shareholders
so companies do stock split mainly to
increase the liquidity in the market for
example if a stock is trading at rupees
5000 then it is not possible for small
retail investors to invest their money
due to that there is lower demand for
stocks that are trading at higher price
in order to increase the demand or
liquidity companies split the stock
price that makes it easy for retail
investors to invest in the company for
example recently irctc splitted its
stock into ones to five and before the
stock split the share was trading at
around levels of 4500 and after the
split the share was available at around
rupees 900. then recently companies like
apple india had splitted stock into ones
to five dixon technology splitted sure
into 1 is to 5. please note that the
stock split changes the face value of
the stock for example if face value of a
share is rupees 10 and it splits its
share into 1 is to 5 then its face value
would become rupees two
if the face value becomes rupees one
then company can't split the stock price
any further now as far as stock split
impact on existing shareholders is
concerned there's an increase in total
shares as per your stock split for
example if the shareholder hold 10 share
of the company that announced stock
split into one is to 2 then total shares
would become 20. if the stock split is
one is to 5 then total shares would
become 50. please note that the share
price would also fall proportionally so
net net there won't be any change in the
profitability of the shareholder
in simple terms a bonus issue means the
existing shareholder gets additional
shares for example a bonus issue of twos
to one means the existing shareholders
would get two new shares for every
single share they hold for example if
shareholder has 10 shares of the company
and company announced a bonus of twos to
one then shareholders will get 20
additional shares and that will result
in a total of 30 shares if there's a
bonus of one is to two then it means
existing shareholder will get one
additional share for every two shares
they hold if a bonus issue is of one is
to one then it means existing
shareholder will get one additional
share for every share they hold
interestingly in bonus issue also the
share price would fall in equal
proportion for example if there's a
bonus issue of one is to one then
existing shareholder will get one
additional share for every share they
hold but the share price would fall by
50 percent
now when both stock split and bonus
issue increases the total share and
reduces the stock price in equal
proportion then what is the difference
between stock split and bonus issue
so the major difference is that in stock
split the face value reduces in equal
proportion
whereas the face value does not fall in
case of bonus issue so even the
companies with face value of rupees 1
can issue bonus whereas a company with
face value of rupees 1 can't issue stock
split another difference is that in
stock split there is no change in the
reserves and share capital of the
company whereas in bonus issue the share
capital of the company increases and the
reserves reduces in equal proportion
in short both bonus issue and stock
split are done to increase liquidity in
the market by increasing the total
issued share and reducing the share
price
recently iex has announced a bonus issue
of twos to one where existing
shareholder would get two new shares for
every one share they hold but it will
also reduce the share price in equal
proportion please note that there is a
fixed date for both bonus and stock
split that companies announced
beforehand investors get a chance to
invest in the company before the stock
split or bonus issue
so right issue is an invitation to
existing shareholders to purchase
additional new shares in the company
with the right the shareholder can
purchase new shares at a discount to the
market price now the question is why
would a company issue shares at a
discount rate as compared to the market
price to the existing shareholders so
generally companies come up with right
issue to raise capital this capital
could be used to repay the debt if the
company is in financial trouble or this
capital could be used for funding the
expansion plan or acquisition of a
company this gives existing investors an
option to buy the shares at discounted
rate for example last year on 14 may
2020 reliance industries issued a right
issue where existing investors were
given the rights to buy one new share of
the company for every 15 shares they
hold at rs 1257.
at that time reliance was trading at
around 1460.
so the issue price was at around 14
discount to market price
for example if the extinction holders
have 30 shares of reliance industry then
they can apply for the rights of two
reliance shares this gives an
opportunity to existing investors to
invest at a discounted rate and gives
the opportunity to the company to raise
capital again this right issue is not a
compulsion it is an option existing
investors can either choose to opt for
it or skip it
remember that the right issue is only
for existing investors of the company
and not for the new investors but it is
not that the right issue is always good
because of discounts before you apply
for the right issue make sure that you
understand the reason behind the right
issue rather than simply getting tempted
to buy the right share at discounted
price
sometimes companies also offer the right
issue when they are struggling with cash
and need to pay their debts in that case
the right issue can be risky
so in this video we discussed the three
major corporate events that is stock
split bonus and right issue just to
summarize stock split and bonus is
declared to increase the liquidity in
the market and it results in increase in
issued share but proportional decrease
in share price so net net there's no
change in market cap although the stock
split changes the face value of the
company whereas bonus doesn't change the
face value bonus is given only to
existing shareholders on the other side
right issue is an activity to raise
capital either to pay off the debts or
invest in expansion plan or acquire a
company here the existing shareholder
get the option to offer the right issue
at a discounted rate and the company
gets the funding i hope now you clearly
understand the difference between all
these three events and the impact on the
investors if you find it useful give it
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