If the market’s ups and downs were not enough to make our poor proletarian investor’s hearts shake, there are also splits and bonuses making us crazy. They don’t cause any gain, sometins some small losses, but they make us see stock price tumble in seconds. Of course it is just appearance, but… Isn’t it scary?

I am watching stockmarket’s opening today… Suddenly… What happens?

I see SAY fall 50% in a few seconds!

Is it an atomic war between India and Pakistan?

NO. It was just a stupid a stock bonus.

SAY for some strange reasons decided to give its stockholders some bonus stocks. That cause the number of stocks to increase and of course the price of each stock to decrease. Now we own more SAY stocks that are worth less $ each. Useless.

This should be the official communication:

” The members of the Company at the Annual General Meeting held on August 21, 2006,
approved the issue of bonus shares in the ratio of 1:1 (one share for every one share held).
Further, the Board of Directors has fixed the record date as October 10, 2006 for ascertaining
the eligibility of shareholders for bonus shares. The process for allotment, credit of shares
into demat account and dispatch of physical share certificates, wherever applicable, will be
completed within 10 days from the record date. Further, ex-bonus date will be announced by
the respective stock exchanges and shareholders are requested to visit their websites for
information on ex-bonus date.”

Now a question comes natural:

What is the difference between a stock split and a bonus?

Answer is not simple. Since I don’t completely understant it, I will just cut and paste from somewhere. I better admitt it, because I’m sure you’d figure out it is not mine anyway 🙂

Split Issue:
The face value of each share is split into two. Its like giving 50 cents for every dollar you hold. The company incurs no expenses (other than administrative) for such a split since its from the existing pool of shares. Net cap of the company also remains the same.
Since the net-value remains the same, the divident declared by a company is unaltered.

Bonus Issue:
The company issues additional shares at face value to its existing shareholders. For these, the company dips into its cash reserves. Since you are given additional shares to the ones you hold you are entitled to any subsequent dividend declaration on those additional shares.

But its still not doubling your money … in the sense the 40 dollar share is not going to turn into 2 shares worth 80 total. Remember, that as a share holder you are also the part owner of the cash reserves. So its your own money handed back to you as a share.

Both split and bonus typically results in 1/2 the current price (because of the extra float) + some more (because the share is more affordable hence increasing demand).

So, if say the current price of Satyam as of the split date is $40.00 you can expect the trade next day around $20.40 odd. But thats more of a thumb rule, everything depends on the actual demand but anythign more is a plus considering that the price usually ramps up much before the split date