11.1 – Corporate Actions
Corporate actions are financial initiatives undertaken by a company that results in a change to its stock price. There are different corporate actions that an entity can choose to initiate. A good understanding of these corporate actions gives a clear picture of the company’s financial health and determines whether to buy or sell a particular stock.
This chapter will examine the five most important corporate actions and their impact on stock prices. A corporate action is initiated by the board of directors and approved by the company’s shareholders.
11.2 – Dividends
Dividends are portions of profits made by the company, which are distributed to the company’s shareholders. Dividends are paid on a per-share basis. For example, Infosys recently declared a dividend of Rs.42/- per share, which means you get Rs.42/- as dividend income for every share you own. Suppose you own 100 Infosys shares; you can get 100*42 = Rs.4,200/- as dividend income. The company directly remits the dividends to your bank account (linked to your Demat account). The dividend paid is also expressed as a percentage of the face value. In the above case, the face value of Infosys is Rs.5/-, and the dividend paid was Rs.42/- hence the dividend payout is said to be 840% (42/5).
It is not mandatory to pay dividends every year. If the company feels that instead of paying dividends to shareholders, they are better off utilizing the same cash to fund a new project for a better future, they can do so. Typically, companies in the growth phase (young companies growing fast) choose not to pay dividends but rather to plow back the profits into the business for more growth. However, when the company’s growth opportunities slow down and it holds excess cash, it would make sense to reward its shareholders via dividends. Cash with shareholders makes more sense than retaining the cash on the company’s book, and distributing the dividends may be the best way forward for the company.
The dividends need not be paid from the profits alone. If the company has made a loss during the year but it holds a healthy cash reserve, it can still pay dividends from its cash reserves.
The company’s board members at the Annual General Meeting (AGM) decide whether to pay a dividend. The dividends are not paid right after the announcement. This is because the shares are traded throughout the year, and it would be difficult to identify who is eligible to receive dividends and who isn’t. The following timeline would help you understand the dividend cycle.
Dividend Declaration Date: This is the date on which the AGM takes place, and the company’s board approves the dividend issue
Record Date: The date the company decides to review the shareholder’s register to list all eligible shareholders for the dividend. Usually, the time difference between the dividend declaration date and the record date is 30 days.
Ex-Date/Ex-Dividend date: The ex-dividend date is normally set two business days before the record date. Only shareholders who own the shares before the ex-dividend date are entitled to receive the dividend. This is because, in India, the equity settlement is on a T+2 basis. So for all practical purposes, if you want to be entitled to receive a dividend, you need to ensure you buy the shares before the ex-dividend date.
Dividend Payout Date: The date on which the dividends are paid to shareholders listed in the company register.
Cum Dividend: The shares are said to be cum dividends till the ex-dividend date.
When the stock goes ex-dividend, usually, the stock drops to the extent of dividends paid. For example, if ITC (trading at Rs. 335) has declared a dividend of Rs.15. On ex-date, the stock price will drop to the extent of the dividend paid, and as in this case, the price of ITC will drop down to Rs.320. The reason for this price drop is that the dividend amount paid no longer sits on the company’s balance sheet; hence the stock price is adjusted. From the balance sheet perspective, dividends paid are considered cash out. Hence the new stock price has to factor in the shrunk balance sheet. Hence the price drops. That said, you will not always notice a significant price drop in the share price.
Sometimes, the company pays out a special dividend. A special dividend is non-recurring and happens on a ‘one-time basis.’ The special dividends are usually very large payments compared to a regular dividend, and that’s when the stock price significantly drops. The drop in stock price should not be considered negative as you would receive a cash payment as a shareholder.
Lastly, dividends can be paid anytime during the financial year. If it’s paid during the financial year, it is called the interim dividend. If the dividend is paid at the end of the financial year, it is called the final dividend.
11.3 – Bonus Issue
A bonus issue is a stock dividend allotted by the company to reward the shareholders. In regular dividends, cash is paid out to shareholders, but in a bonus issue, stocks are paid out instead of cash. The bonus shares are issued out of the reserves of the company. The shareholders receive these free shares against shares they currently hold. These allotments typically come in a fixed ratio of 1:1, 2:1, 3:1, etc. In a bonus issue, the stock price declines to the extent of the bonus ratio, but this decline should not be mistaken for a correction in stock price or a fall.
If the ratio is 2:1, the existing shareholders get two additional shares for every share they hold at no additional cost. So if a shareholder owns 100 shares, 200 additional shares will be rewarded. The total holding after the bonus issue will become 300 shares. When the bonus shares are issued, the number of shares the shareholder holds will increase, but an investment’s overall value will remain the same.
To illustrate this, let us assume a bonus issue on different ratios – 1:1, 3:1 and 5:1
| Bonus Issue | No. of shares held before bonus. | Share price before Bonus issue | Value of Investment | No. of shares post Bonus. | Share price after Bonus issue | Value of Investment |
|---|---|---|---|---|---|---|
| 1:1 | 100 | 75 | 7,500 | 200 | 37.5 | 7500 |
| 3:1 | 30 | 550 | 16,500 | 120 | 137.5 | 16,500 |
| 5:1 | 2000 | 15 | 30,000 | 12,000 | 2.5 | 30,000 |
So as you see, in a bonus issue, only the number of shares increases, and your investment value remains the same before and after the bonus issue.
The bonus announcement date, ex-bonus date, and record date are similar to the dividend issue.
Companies issue bonus shares to encourage retail participation, especially when the company’s price per share is very high, and it becomes tough for new investors to buy shares. The number of outstanding shares increases by issuing bonus shares, but the share price is slashed, as shown in the example above.
Think about this – fewer retail participants can buy or sell that share if the share price is bloated (I mean just the per-share price here, not the valuation). For example, the share price of MRF Limited is in the region of Rs.90,000 per share. A retail investor has to shell out 90K to buy and invest in 1 share, and this also means a small retail investor, with, say, Rs.25,000 to invest, can never buy MRF. Many retail investors spread the risk across 100s and 1000s of investors as opposed to a few investors. Hence, when the stock price bloats, companies issue a bonus share to slash the stock price without impacting any other financial metric, which is one reason to issue a bonus share.
Why isn’t MRF splitting the shares, then? Well, at the end of the day, the decision is solely dependent on the company and I guess MRF is yet to make up their mind or perhaps they just wont indulge in these corporate actions 🙂
11.4 – Stock Split
The word stock split sounds weird, but this happens regularly in the markets. What this means is quite literally – the stocks that you hold are split!
Similar to a bonus issue, when the company declares a stock split, the number of shares held increases, but the investment value remains the same. The big difference between a bonus and a split is that in the bonus issue, the face value of the company remains unchanged, but in a stock split, the face value changes. Suppose the stock’s face value is Rs.10, and there is a 1:2 stock split, then the face value will change to Rs.5. If you owned one share before the split, you would now own two shares after the split.
We will illustrate this with an example:
| Split Ratio | Old FV | No. of shares you own before split | Share Price before split | Investment Value before split | New FV | No. of shares you own after the split | Share Price after the split | Investment value after the split |
|---|---|---|---|---|---|---|---|---|
| 1:2 | 10 | 100 | 900 | 90,000 | 5 | 200 | 450 | 90,000 |
| 1:5 | 10 | 100 | 900 | 90,000 | 2 | 500 | 180 | 90,000 |
Like a bonus issue, a stock split encourages more retail participation by reducing the value per share. The dates and timeline (announcement date, ex-date, record date, etc.) are similar to dividend and bonus issues.
11.5 – Rights Issue
The idea behind a rights issue is to raise fresh capital. However, instead of going public, the company approaches its existing shareholders. Think about the rights issue as a second IPO and a select group of people (existing shareholders). The rights issue could indicate promising new development in the company, but this is not always true. As an investor, you need to evaluate the reasons for the right issue and determine if it makes sense. The shareholders can subscribe to the rights issue in the proportion of their shareholding. For example, 1:4 rights issue means for every four shares; the shareholder can subscribe to 1 additional share. The new shares under the rights issue will be issued at a lower price than what prevails in the markets. For example, if a stock is trading at Rs.500 per share, then the right issue could be at a 20% discount, at Rs.400 per share.
However, a word of caution – The investor should not be swayed by the company’s discount, but they should look beyond that. A rights issue is different from a bonus issue as one is paying money to acquire shares. Hence the shareholder should subscribe only if he or she is completely convinced about the company’s future. It can so happen that after the company announces the right issue, the stock price can go below the right issue price. If the market price is below the subscription price/right issue price, it is cheaper to buy it from the open market.
11.6 – Buyback of shares
A buyback can be seen as a company’s method to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market; however, the buyback of shares is an important corporate restructuring method. There could be many reasons why corporates choose to buy back shares…
- Improve the profitability on a per-share basis
- To consolidate their stake in the company.
- To prevent other companies from taking over.
- To show the confidence of the promoters about their company.
- To support the share price from declining in the markets.
When a company announces a buyback, it signals the company’s confidence in itself. Hence this is usually positive for the share price, but like other things in the market, always evaluate the reasons for the corporate action.
Key takeaways from this chapter
- Corporate actions have an impact on stock prices.
- Dividends are a means of rewarding shareholders. The dividend is announced as a percentage of the face value.
- You must own the stock before the ex-dividend date to get the dividend.
- A bonus issue is a form of stock dividend. This is the company’s way of rewarding the shareholders with additional shares.
- A stock split is done based on the face value. The face value and the stock price change in proportion to the change in face value
- A rights issue is how the company raises fresh capital from the existing shareholders. Subscribe to it only if you think it makes sense
- Buyback signals a positive outlook for the promoters. This also conveys to the shareholders that the promoters are optimistic about the company’s prospects.
First of all many thanks for sharing knowledge in a format which everyone can understand.
I have a doubt on your below impact on stock price due to dividend payment –
“When the stock goes ex dividend, usually the stock drops to the extent of dividends paid. For example if ITC (trading at Rs. 335) has declared a dividend of Rs.5. On ex date the stock price will drop to the extent of dividend paid, and as in this case the price of ITC will drop down to Rs.330. The reason for this price drop is because the amount paid out no longer belongs to the company.”
If this is so easy then will it not create a shorting opportunity just before the ex-dividend date if the dividend amount is significant?
Thanks for your kind words.
With respect to shorting just before ex-dividend..its not so easy. Think about it, everybody attempts to do the same 🙂
Not clear. Please elaborate.
When dividends are expected, the stock tends to dip to the extent of the dividend paid. This is a known fact and there is no edge shorting based on this expectation.
This is not the correct explanation Karthik. When you are shorting a cum-dividend stock and squaring off when the stock goes ex-dividend, you need to square off with the ex-dividend stock plus the dividend amount. Since you have to pay the dividend amount as well to square off, there is no gain.
To sell short you first must set up a margin account with your broker. A margin account allows you borrow from your brokerage company using the value of your portfolio as collateral. The general rule is that the value of your portfolio must equal at least 50% of the size of the short sale transaction. In other words, If you have Rs. 100,000 worth of stock/cash in your margin account, you can borrow Rs. 200,000 of stock to sell short.
Prateek – are you talking about shorting in the spot or Futures market?
So what Prateek says, is it correct?
How to keep a track or get to know about these dates in specific?
You will have to follow the news, Rakesh.
dear sir its my humble request to you plz provide ( I P O ) facility in zerodha its self only this what we are missing for example i cant apply ipo from zerodha every time i need to go netbanking ..etc…
Narendra, this is the only way for now – https://support.zerodha.com/category/trading-and-markets/corporate-actions/articles/how-to-apply-for-ipos-and-how-to-stay-informed-of-new-ones
If someone bought shares of BEL yesterday (27th SEPT). will the shares be delivered with price adjusted for ex bonus. I mean deliveries for BEL yesterday were at 60% so all those who bought were already aware that tomorrow price will go down 10%.. so why they’d take such a risk ?
I’m thinking that during delivery of these shares the price should be adjusted to ex bonus.. or is it not ?
Thanks in advance for the info.
Cheers!
Its not really a risk as the prices are adjusted to the extent of bonus. SO there is no risk.
how much time required for bonus share credit in demat account. ?
Pradip, it can take upto 15 days to get credited to your DEMAT Account (depends on the RTA handling the company’s shares).
Check this article on the Support Portal for more
I have a question wit regards to dividend…I some where read on google DAT stock price will get reduced to the extent of percentage declared…ex:if 300 price stock company declared 40% of face value 10…den stock price will reduced to 40%..which is Rs.120 …is it true…plz provide some info…thanks in advance
No, 40% is calculated on the face value. So that would be 40%*10 = 4. Hence, the stock price may reduce to 300-4 = 296. However, you may not experience this for small dividend payouts. Happens when large dividends (special dividends) are paid out.
How can we call the Bonus Issue as a reward to shareholders when the value of investment is not increasing?
Thanks
With the Bonus issue the number of shares increases, this means when dividends are issued you earn more money 🙂
Does the Face Value remain the same on bonus issue?
Yes, it does.
Karthik. first of all thanks for the info sharing. Really fantastic initiative.
My question to your response for
So, what is the difference between Bonus issue and Stock Split? seems to be a very thin line.
1) The value of investment is not increasing in both cases.
2) The # of shares remains the same
So the difference is the change value remains same in Bonus issue and reduces in Stock split?
Bonus issue – you get additional shares against what you already hold. This is also considered as a dividend in the form of new shares issued. The split is dividing the shares. Both cases number of shares increases, value remains the same.
Hi,
Thanks for the great initiative by zerodha.
Its really helpful.
I have a doubt on these topics- bonus issue and stock split.
In both the cases the number of shares we are holding increases but the value remains the same?
Except the face value decreases by stock splits.
Are there any other differences between bonus issue and stock split.
Please explain.
Thanks.
Yes, the investment value remains the same. In stock split, the Face value reduces and in Bonus issue it does not. In both the cases. This helps in realizing a higher dividend value.
How does Stock Split and Bonus shares help us realize more dividend value.
According to my understanding,
Consider before Stock Split FV of a XYZ share is 10. Dividend announced would be 1000% ie Rs 100 per share. After Stock Split FV would be 5 and 2X shares. Dividend announced would be 1000% ie 5*2*10 = 100 for 2 shares. Dividend would not increase right.
In case of Bonus since FV does not decrease the Dividend realization increases right?.
That right. Maybe I need to rewrite this bit. But there is another angle here – capital appreciation, especially for companies with strong capital structure and business model. For example Relaxo Footware was trading around 800 in early 2014..the stock split and the value dropped to 175. The number of shares increased and the stock continued to rally…its back to 800 now, so in the whole process massive wealth has been created. This is one of the advantages of stock split.
Hi,
Here I am not able to understand 5*2*10. What is 10 in this case ?
Face value?
Hi Karthik,
Please mention this is the module, in case of stock split the face value also splits, while in case of bonus shares the face value remains the same. Otherwise both look exactly the same just the name difference.
And thanks I have been confused for a long time about these, only came to know from the comments.
Is that not mentioned already? If not, I will plug that in. Thanks for pointing, Tanmay.
“Only shareholders who own the shares before the ex dividend date are entitled to the dividend.”
If I bought the shares 4 days before the AGM and sell on AGM day, still I am entitled to get the dividend?
No Sir. In fact AGM is when the decision on any corporate actions (bonus, dividend, stock split etc) is taken. For you to enjoy the benefit, you need to be a shareholder by the record date.
So if I buy it before AGM and sell it after record date, am I eligible for dividend?
Yes Sir, you will be.
if I buy shares of company 3 days before record date, am I eligible for bonus issue?
Yes you will be eligible as long as you hold the company’s shares before the record date.
Sir, if I buy after AGM but before EX date , then will I get the benfit ?
Yes, you will.
How a 5:1 bonus will be issued, if a investor has 4 shares or 21 shares. Do the investor lose benefit for some shares in this case? If so, will that money be moved to share capital from surplus or not?.
A 5:1 bonus indicates 5 additional shares are being issued for every 1 shares. If the investor has 4 shares (before issue), he would get 20 additional shares, likewise if you held 21 shares.
Sorry I didn’t mean that, I should have put that as 1:5. Will a share holder get bonus if he holds 4 shares when the company declares 1 bonus for every 5 shares? If not, is there any money compensation for that 4 holding shares?
Well in that case it is quite evident – for every 5 shares you get 1 free. Clearly you wont be entitled to receive this if you have 4 shares. However, sometimes you do get a proportional ‘fractional allotment’ which can be sold back to the company for cash.
Hi Karthik..
The example of stock split seems to be wrong, as the face value has become 2 from 10 that is one fifth , then the no of shares will be multiplied by 5 and rate will be divided by 5 . That implies if I was holding 100 shares of Rs 900 at face value 10 and new FV is 2 than my no of shares will become 500 and new rate will be 180 and my investment will remain the same.
Thanks again! I have made the corrections 🙂
can company declared dividant date and record date as a public ? So that trader can buy share for dividant? If yes how can i know dividant date?
In fact companies do declare this. You will have to keep track of this on a case to case basis.
Hi,
you’ll check the upcoming split, Right, bonus and dividend event on this following link:
http://www.moneycontrol.com/stocks/marketinfo/dividends_declared/
Thanks for the link!
Sir, I have some questions. If face value of a share comes to Rs. 1 after share split. So after this stage what that company will do for further liquidity increase. What kind of benefit we can get from them as a share holder by buying the shares at face value 1rs. for example TCS share is trading now at 2642.00 rs. Face value is 1rs. . What will they do to increase the liquidity after this? Is it safe to buy a share having face value 1 ? what steps they will take to increase more investors? Please answer this also. For long time investment which is safe ? a share having face value 10 or face value 1, apart from other factors.
Nathan..liquidity is not really a function of the face value of a stock. Liquidity purely depends on the demand supply dynamics. Even when the FV reaches 1/-, the company can boost its liquidity by issuing bonus shares. Yes, it is absolutely safe to invest in shares with FV of 1. It really should not matter as long the company is good (like TCS).
Thanks a lot sir, You cleared all my doubts. I am new to your site. Very good experience.
Good to know that Nathan 🙂
Hi, my query is , in case of stock split example, a ratio of 1:5 indicates that every stock splits into 5 ,for 100 shares you get 500, by following same logic , for a stock to split into 2 , shouldn’t ratio be 1:2 vs as you have mentioned 1:1. thanks
1:1 indicates that for every 1 share you have, you are entitled for an additional share. Hence if you owned 10 shares before split, you’d now own 20 shares after split. Likewise in a 1:2 split, if the split is 1:2 then for every 1 share you own, you are entitled for additional 2 shares. Hence if you owned 10 shares you will get 20 additional shares taking your total ownership to 30 shares.
Mr. Karthik, As per your explanation on query of Mr VISHVENDRA89, we will receive 30 shares in case of 1:2 ratio stock split.
In that case figures mentioned in example of stock split 1:5 is wrong. New number of shares owned should be 600 and New face value should be 1.67.
Please check once again and confirm.
FV cannot be fractional, it has to be a whole number. Will look through the number again and get back on this.
Hi , What you are saying is correct. There is nothing like 1:1 stock split. It should be 1:2. Typo error 🙂
Yes Amit, Spot on with the typo. It should be 1:2
Awesome stuff this is! Thanks so much for providing us this platform. Quick question Sir, what do you think about the recent RBI monetary policy?
Thanks Arbaz – Btw, you should check Mr.Deepak Shenoy’s view on Macro Economic activities. He analysis is excellent – http://capitalmind.in
Specifically wrt to the recent rate cut –
http://capitalmind.in/2014/12/rbi-keeps-rates-unchanged-will-wait-till-early-next-year/
Hope this helps.
Hi Karthik,
Based on your explanation to VISHVENDRA89, when shares were split in 1:5 ratio…number of shares after split should be 600 and price should be 150..isnt it so? one more doubt is when will company decide to go for Bonus shares and when for stock split….i know there will not be hard and fast rules but on what basis….thanks for your prompt replies to all of questions over here….
Yes, the number of shares will be 600 (100 + 500) and the price will be reduced by 1/5th. One of the common reasons for a bonus issue – swelling Reserves of the company. When the reserves starts increasing and the company accumulates a lot of cash they usually opt for a bonus issue. I guess the same thing happened with Infosys recently.
Splits are usually done to increase the liquidity of the stock. When stock price increases in optical value (like Eicher, MRF etc) it would be hard for retail participants to trade these shares. Hence companies opt for splits – to make it easier for retail traders, and thereby increase the liquidity.
Hi sir,
where do we find street expectation data of a company before announcement?
and how do we know the result exceed expectation or not on announcement day
thank u sir
Check this – http://www.moneycontrol.com/earnings/. Not for all companies , but at least for the top 100 ones.
1)should the stock be in my demat before ex-date or am i entitled to dividend if i purchase the share 1 day before ex date??
2)Am i entitled to a dividend if i sell it after exdate and before record date
*2)Am i entitled to a dividend if i sell it on exdate
1) You’ll have to buy the Stock before ex date to receive dividends. If you buy stocks before ex date, the stocks will be in your account by Record date.
2) Yes, you’ll get dividends if you sell on Ex-date.
Here’s a link which explains the whole dividend flow: http://tradingqna.com/639/shares-dividend-announcement-receive-dividend-what-record?show=639#q639
Hi Karthik,
I want to know suppose i have bought Nifty Options using a limit order or market order and later-on can i place a pending stop loss limit or market order?
I’m assuming you are referring to the sq.off order. Yes, you can.
Important note read every one thank
Important note read every one thank s……
SIr , as paying dividend is optional for a company , what other benefits does shareholder gets if he do not intend to sell his share ( assuming company does not declare any dividend in a particular year)?
Other benefits can include –
1) Capital appreciation
2) Bonus, Rights, Stock Split
3) Benefits of M&A – as a result of which you may end up getting shares of other companies
4) Bonus Debentures – As in the current case of NTPC
thank you.
WC 🙂
i guess share price doesn’t change after bonus issue as the additional capital is from reserves of the company?
It does nihaal. Assume you hold 100 shares at Rs.50. Your investment here is Rs.5000/-. Now assuming the company issue 1:1 bonus you will now hold 200 shares. If the share price does not change then you will have 200 * 50 = Rs.10,000/- which cant happen. So the share price has to proportionately come down. So you will have 200 * 25 = Rs.5000/- .
Hi,
I have a few doubts regarding Bonus issue.
1) I understand bonus issue mechanism to be similar to follow-on-public offer except that the new shares are issued to the existing shareholders in proportion to their holdings. Now, if the stock price in case of bonus issue halves(in case of 1:1 bonus) only on account of EPS getting reduced, why is it not the case with FPO.
2)And how the company arrives at the total number of bonus shares to be distributed. Suppose we have x amount of reserves capitalised, then bonus shares = x/stock price, the stock price being market value of stock, Is this how it is decided?
1) Even with an FPO, the equity base increases which dilutes the EPS further.
2) I’m not sure if there is a formula to arrive at this, I think this is more to do with the board’s decision.
Thanks for the reply.
Happy learning!
if record date of bonus share issue and i sell share before record date i will get bonus share or not
Nope you will not get. You need to be a shareholder on record day for you to be eligible for bonus shares.
Thanks Karthik
Dear Karthik
if share price less than FV what should be do mean we should buy stock or not?
Stock can go below the FV – usually happens when the sentiment in the stock goes very low. If its a good stock but a temporary negative sentiment then you can buy the stock with a hope it will bounce back…otherwise you should avoid. However you also need to develop a sense to identify good business..you will need Fundamental Analysis for this .
A Question
Following your example if a stock with a market value of 100 announces bonus in the ration of 1:1, its share price should become half ,i.e., 50.
But when I checked the graphs of a few stocks on moneycontrol I found out that this is not happening.
Infosys declared bonus(in the ratio of 1:1) on 2 Dec 2014 and its price on 3 Dec fell just by a mere 5 points instead of halving!!!!
Also Wipro declared dividend(of 250%) on 22 Jan but instead of falling its prices actually rose the next day(and not just the next day, they rose for the next few days for that matter and reached its 52 week High!).
I don’t seem to get it. Do these things happen only in theory or am I missing something?
Ganesh – There are two things you need to evaluate when looking at bonus issues. (1) The date they make the announcement (2) The record date. The announcement date is the day the company comes out in the open and suggests that it will pay a bonus. While the record date is the actual day of implementation. The stock price will go down by the required amount on the record date and not really the announcement day. So next time a company makes a bonus announcement, do make sure you check the record date as well.
The dividends announcement is usually made on the face value of the company (FV). So in Wipro’s case 250% dividend on its FV of Rs.2 is just Rs.5/-…so that does not really impact the stock much. Hence the stock will move in accordance to the general market sentiment..which in case of Wipro seems to be bullish. Hence the stock continued to rally.
Ok Now I get it. Thanks for the clarification, but after rechecking I found out that the stock price of Infosys did fall before the declaration date but still it fell from 2180 to 1920(approx values). This was a mere fall of 210 points. In theory, it should actually become half(1040 in this case). So can a bullish market sentiment be so strong that it can convert a 1040 points (theoretical) reduction in the MV to a mere 260 points reduction in the market value? Or is it that I am missing something again?
A bullish market sentiment can help the stock bounce back immediately from the split value. For example if the stock price is supposed to be 1040, then a bullish market can help the stock bounce back from 1040 to whatever value. Nevertheless the low of 1040 will be seen on the charts.
Dear Sir,
How does a merger of two or more stocks impact Holdings and Investment cost under ‘All Stock’, ‘All Cash’ and ‘Stock and Cash combined’?
How does an acquisition of a stock impact Holdings and Investment cost of original as well as acquired stock.
Thank you Sir.
Joseph – This is a highly elaborate topic and I’m afraid I cannot give you a straight forward answer here – maybe we should have a module on M&A on Varsity sometime soon 🙂
That’s fine sir, will be waiting for your write up 🙂
Thanks for your patience Joseph!
In one of the comments ypu mentioned the following..
1. Benefits of M&A – as a result of which you may end up getting shares of other companies
2. Bonus Debentures – As in the current case of NTPC
Can you elaborate on these topics as i could not understand..
Thanks..
When a M&A happens two companies agree to work together and leverage their synergies. For example PVR and Cinemax went through a merger…when it happened they both agreed to swap shares in a certain ratio. So shareholders of PVR were given Cinemax shares and vice versa.
Regarding NTPC – they issued bonus debentures…usually companies give bonus shares but NTPC issued bonus debentures…which is usual. Check this http://www.business-standard.com/article/markets/ntpc-bonus-debenture-issue-is-a-win-win-for-all-stakeholders-115031300183_1.html
sir,it would be glad if you introduce a module on all the terms in the company’s balance sheet and how to perceive them just to gauge an idea abt how good a company’s position is which goes a long way in determining whether to buy a stock or not.asking a tad too much but wud be very much helpful and we r not left stranded at the mercy of pseudo stock gurus!!!
Prasad in fact we have gone beyond the jargons and explained everything you need to know about Balance Sheet, P&L, and cash flow. Have you checked this module ? – http://zerodha.com/varsity/module/fundamental-analysis/
sir,what’s the job of the face value of a share.what does it actually indicate given the fact the share price is different.is it that it’s only importance is during the stock splits or the face value determines the quality of a stock.pls explain why to have a face value in the first place and how is it determined????
Prasad – for all practical purposes FV is useful only for corporate actions. However when you get into valuations, there are other uses of FV. Have discussed the same here – http://zerodha.com/varsity/chapter/equity-research-part-2/
sir,how does a debenture gets traded on the stock market.i mean,what to make out of a certain japanese bonds loosing its sheen on the wake of the greek crisis.if it’s a debt instrument shouldn’t it mean that i issue a bond of 10rs. say for 10yrs.so i get 10 rs from u now and after 10yrs i owe u 12 rs.isn’t this the way how the debt market works jus like in paying interest and settling the debt.how do the bond prices fluctuate then.what happens to the bondholders in such a scenario and wouldn’t it be just as risky as equities????so sorry to disturb u but i cant seem to get it
Bond prices are influenced by the prevailing interest rate in the economy. They are invesly proportions…so rate go up, price comes down and vice versa. So yes, bonds are also risky..but much less risky than Equities.
yes,i can get the inverse relationships sir,wrt the bond prices and interest rates but then assuming,i was aboout to get 150rs on maturity of a 100rs.bond after 10yrs.now,in the 10th year,for some reason the bond price goes down;will i get the same 150 rs as promised to me(that’s wat the bond means) or will i get according to the prevailing market conditions.pls explain this sir and thanks a ton for ur earlier replies.also tell me can bonds be bought from the same trading a/c????
so sorry to disturb you,sir but you haven’t answered my above question.waiting eagerly for your answer
Sorry I seem to have missed your question, thanks for the reminder. Yes, you are supposed to get Rs.150 upon maturity….unless the issuer defaults. Defaulting on a bond payment is a major issue and will have a severe -ve repercussions…so most companies attempt not to default on their bond payments. I suppose you can hold few bonds (listed on exchanges) in DEMAT form.
thanks sir!!!!!!!!
Thanks for this initiative!
One doubt I have is, are the bonus shares taken from unreserved pool.
Going to the example in the earlier chapters, say 50% of shares are held by Promoter, VC’s, PE’s and 30% is owned by public.
So these bonus shares come out of the remaining 20%?
Bonus shares are usually issued from the free reserves of the company.
Hi,
In rights issue how early can I sell my existing shares and be still be able to qualify for rights issue.Is it ex-rights date or record date. In other words if I sell my shares on record date will I still qualify for rights issue (b’coz settlement happens at T+2)?
Thanks
You need to be a shareholder on Ex day in order to be eligible for any corporate action. For all practical purposes it is advisable to hold the shares till record date.
What is the difference between FV (face value) of a share and share price (please refer the table in stock split)?
Face value is like a nominal value that the company assigns to the stock..usually Rs.10 or Rs.5. Share price is the value market assigns to the companies …so its market driven.
So, when we trade. We trade by share price or hace value?
Share price.
How did the investor get profit if in the example ITC trading at Rs. 335 declares dividend of Rs. 5 in AGM and next day price go down to Rs. 330 and on dividend payout date he got dividend. Value of the investment will remain same.
Not sure where I have mentioned ‘profit’…but anyway, dividend is tax free…so in a sense its advantageous for the investor to have a tax free income.
Dear Sir,
Suppose a company declares bonus and dividend. Ex-date for the bonus and dividend is on the same day, will investors receive dividend on shares held as on exdate-1day as well as bonus shares?
Example: Comapny ABC declares bonus 1:1 and dividend 20%. Suppose an Investor holds 1000 shares in ABC on exdate-1day, how much dividend will the investor receive?
1000*10%= 100
OR
2000*10%= 200 (Including bonus)
Regards,
Joseph
Joseph it will be either 10% on 1000 or 5% on 2000.
Thanks Sir, how do companies normally announce… 10% or 5% in this case
Joseph – this depends on the profitability of the company.
Sir, what i am asking here is, if my example is a real scenario whether the company will announce dividend of 5% on 2000 or 10% on 1000?
Ah ok, got it – its upto the company to decide this and as far as I know, there are no set rules for this.
Hello sir,
thanks for this excellent article.
my doubt is based on split. suppose face value is rs. 1
and i have 10 shares of ABC Company.
Company announced split shares 1:1. then i will get 20 shares.
so now face value will be 0.5 ?
on every split year after year, …. at what lower price face value can go ?
it may touch 0.05 ?
is there any rules for Face Value ?
Rs.1 shares cant be split further. Usually companies in such situations give out bonus shares.
Sir I cannot understand why the price of the stock should compulsorily go down when the company announces a dividend. Please elaborate . T
When you pay dividends (on a per share basis) cash is taken out from the company, this gets adjusted on a per share basis hence the stock price declines to the extent of the dividend paid.
Suppose I took dividend based trade like.. If company declared 11rs Dividend.. If I bought the share before ex.date @145. on ex date company adjusted share price by 11rs..so new price is 134.. So what will be my profit in this case??
You will earn the dividend amount.
so we are in a no loss no gain situation in case we are given the dividends, because however the stock price will drop down to the equivalent amount. Or is there something that i am missing?
Dividend yield is quite low…think of the dividends as the rental income you get on your apartment and the apartment itself as an investment in your stock.
Works on similar lines.
Sir,
What may be the date of Board Meeting for issue of Bonus Share. Also please explain Board Meeting/ AGM date, Record date, ex-bonus date, bonus issue date etc… with example.
Its all explained in the chapter itself Ranjani!
Hi sir,
how can we get instant news update of GDP and other inflation data for global and india
is there any web links?
If you want it instantly then you will have to subscribe to either Bloomber, Reuters, or cogenics. If you are ok with delayed information then this should help – http://pulse.zerodha.com/
Systematically designed notes ! I appteciate your efforts ! Thank you !
Thanks and I’m glad you liked them 🙂
Hi
Thanks for sharing info. I need some more details on buyback. What will be the record and ex-date in case of buyback of shares? Could you please elaborate
I suppose you are asking this wrt to Dr.Reddy case. The record and ex dates would be as per companies buy back policy.
Hi, I have bought prakash steelage stock on 2nd March 2016 – stock gets splitted into 1:10 and will i get the benefit of the stock split or not.. If not it would be loss ?
THanks,
Raj
You will get additional shares in the ratio of 1:10…the same will be credited to your DEMAT account on Ex date.
Hi Karthik,
If the Dividend, bonus, Right, Stock split and Merge & Acquisition on the F&O segment stock. Then, What happen on the price of Future market & Option premium.
Thanks in advance.
They will react accordingly. Will probably put up a chapter in Futures module discussing the effect of corporate actions on Derivative instruments.
Hi Karthik,
Can you please give me the link. I cann’t find it on that future module. which chapter?
Thanks in advance.
Its not available as of now, we plan to write it sometime in the future 🙂
Hi Karthik,
One more doubt for me. The dividend query available on tradingqna forum stated that for Ex-dividend date & Record Date as below shown:
Ex-Date or Ex-Dividend Date: As the name suggests, Ex-Dividend date is the date on which the stock trades without the dividend included in it. Normally the price of the stock will drop to the extent of the dividend declared on the ex-dividend date. You will have to ensure that you buy the stock before the Ex-Dividend date to be eligible for the dividends. Important: You will NOT get the dividend in case you are buying the stock ON the ex-dividend date.
Record Date: Normally there’s a certain amount of time involved between when the shareholder’s buy stock and when their names are registered in the company’s records. Dividends are paid to shareholder’s whose names appear in the company’s records as on the Record date.
Record date is normally 3-4 days after the ex-dividend date. If you buy the stock by Ex-Date, you can expect your name to be in the Company’s record by the Record Date.
Query:
The above both of the statements are confuse to me.
One is “You will NOT get the dividend in case you are buying the stock ON the ex-dividend date.” in ex-dividend date.
And another one is “If you buy the stock by Ex-Date, you can expect your name to be in the Company’s record by the Record Date”.
My doubt is, if I buy the stock on ex-dividend date. Am I eligible for dividend or not?
Then, why the record date is come on this term? And some company not defines the record date? Why?
I see the money control link some not shown the record date: http://www.moneycontrol.com/stocks/marketinfo/dividends_declared/
Thanks in advance
Settlement happens on a T+2 basis, so even if you buy on Ex dividend date, your name will not reflect in Record date.
Sir since the no of shares increases in both bonus and stock split , doesn’t the intrinsic value of the company decrease ? Should we consider this while calculating the IV ?
If you are referring to intrinsic value in terms of fundamental valuation, then it wont change.
But in the calculation of the IV in DCF method we use the no of shares . Since the no of shares is increasing shouldn’t the IV too decrease ?
Well, the number of shares is multiplied by share price, so the valuation remains the same. Also, thing about this – if by means of corporate actions the company’s valuation decreases, then why would corporate even do it 🙂
Sir,
Have a doubt on Bonus shares, suppose i have a 100 shares of ITC @320 , company issued a bonus 1:1 after my shares number would be 200 shares @320 rs or 200 shares @160 rs.
My doubt is why share price will decrease after bonus issue,
Thanks
Yes, share price will decrease and number of shares increase. But your investment amount will be the same. In your example it would be 200 shares @ 160.
Hi Nithin
My name is D.Omprakash. ID:DO0042. I have some query on record date. eg: ITC announces record date on 06/15/2016 and bonus shares 2:1 If i purchase itc shares on 30/05/2016 then bonus shares will get credited to my account?
Yes, you should be eligible for the bonus.
IF A COMPANY ANNOUNCED BONUS SHARES SAY 1:2 AND SHARE PRICE IS 380 THEN AFTER GETTING BONUS SHARES THEN PRICE OF THE SHARE CONVERTED TO 180 OR LESSSER THAN THAT OR REMAINS THE SAME PRICE 380 WITH 1 BONUS SHARES
Share price will be reduced by half.
Sir,
After Bonus issue of any particular company suppose 1:1 ITC 100 shares @320 , Our share would double (100 become 200 )and price become half(160) right.
But that time market value would be 330, so what ever bonus we are getting can we sell with profit,
I mean in this Example can i sell it in [email protected]
The stock split and increase in shares happen simultaneously so there is no scope for that 🙂
Is there any special advantage buying a company stock after they have announced Split/Bonus?
I see a lot of buying in recent days after companies have announced Bonus/Split.
Not really, as it does not make any material difference to your investments.
Could you explain how bonus issue and stock split are beneficial for both parties company as well as shareholders???
Thanks for putting all this information so nicely…:)
With bonus issue, the number of shares increase, the price of the share decreases…this would lead to higher liquidity. Higher liquidity means more trading, reduced volatility. Reduced volatility means less pain to investors. These are advantages for both the company and shareholders.
Hi, is the record date always after the dividend declaration date?
Yup.
In case of Bharti Infratel the Record date is mentioned as 16 June 2016. In this case if I buy shares of Bharti Infratel on 14th June 16 will I be eligible for the buy back. Will my shares that I have bought reach my Demat account by the Record date?
It will on 16th EOD and reflect in your holdings on 17th morning.
Sir, I want to know. I have bought shares today of Infratel so that on record date my name is on Shareholder list.Now, before buyback actually starts Can i sell those holdings ( for a profit offcourse) and can buy again so as to tender Shares ??
In this way, I am eligible to participate in tender offer and also has shares to tender.
Please Clarity
No, I would suggest you don’t do this as the record date is just 1 day away!
karthik,
No, you are not getting it. I will be selling those holdings say after 5-10 days and will buy again after that before actually buyback starts.
Please clarify
Ok, I guess you can do this.
Thanks Karthik.
How does Buyback Process will work at Zerodha. Manual or Online ? Many Brokers have special window open for buyback surrender.
Can you elaborate , how The process will be if i need to surrender shares for buyback from my Zerodha account
You can send an email to [email protected] indicating your desire to take part in the Buy back. You’ll have to attach the scanned copy of the tender form and mention how many shares you wish to tender for the buyback.
Hi sir,
Can you please how varios factors affect on share price. I mean if company declair bonus shares price of the shares increasing like wise some other actions who can increase or decrease price of the shares.
I’ve done this in the chapter itself!
Bharti Infratel has sent me the Buy back offer’s Tender form. In that form they have mentioned that we have to tender the stocks through my respective sharefholder broker i.e. zerodha by indicating the detils of Equity shares I intend to tender under the Buy-back offer.
Would you please let me know how can I do that? I am unable to find the option to offer my shares for buy back online any where in Zerodha website. Please help.
I am sorry Karthik, My question was already answered by you as an answer to someone else…Thank you. I will send the scanned copy to the mail ID [email protected] mentioning the no of shares I wish to offer. Thank you once again for your patience…
Good luck!
This is still an offline process, I’d suggest you speak to our support executives for this. Thanks.
Suppose i have 105 equity shares of a company x and the company issue bonus share in the ratio 1:2. Then how many additional share will I get? ? If the answer is 52 then is it a loss for me? ?
No, the fractional shares will be converted to cash and the cash will be credited to your bank account.
I am a bit confused understanding bonus and split shares:
Lets say ABC company has a market capital of Rs.1 Lakh and FV Rs.10. The company decided to issue bonus shares and transferred Rs.1 lakh from its reserves and issued bonus shares.
If a shareholder has 1 share, after bonus issue he is getting 2 shares with FV Rs.10 and at the same time the market price is normalized in the same manner i.e., market price will get dropped by half. So what is the benefit the shareholder gets? Even a split does that!
Please clarify.
Well, there is no material benefit as such 🙂 But in the long run, if the company continues to perform well and the profits swell, you can expect a higher dividend yield.
Usually after rights issue announcement whether the share price decrease or increase? Take the case of Karnataka bank , rights announced in the ratio 1 for every 2 shares held @ Rs 70 per share(10 Fv +60 premium). Market price (share price) decreased by Rs 7 to Rs 143 from RS 149.75 around 4.7%, that to bullish market day where nifty peaked to 52 week high and nifty bank jumped by around 2%. What this indicates?
It is usual to expect the stock price to fall after Right issue…this is because there are more number of shares for the given set of earnings. Even the dividend and PE kind of declines. You got to be absolutely sure before subscribing for a rights issue…do it only if you are sure about the growth prospects of the company.
Why does stock decline between dividend declaration and exdate? In your example of ITC, if ITC declared a dividend of Rs. 5, then ITC dropped down from 335 to 330. I did not understand the reason given.
The seller now knows that the buyer will get Rs 5 income after buying the shares. Hence, won’t the seller ask for an additional share price of, say, Rs 4? So, it would actually go up to 339 – why does it drop?
In your reason that the money does not belong to company – I did not understand what it means – why/where is the company in this trade? What I am missing here?
Thanks for the time and effort you are putting here.
Dividend is a cash income which is distributed from the profits made by the company. Will shortly put up a detailed note on how this (and bonus, splits, and rights ) affect the stock price.
REC CMP230.. 28-09-2016 bonus 1:1
today bought option contract 180pe sep @0.05
28-9-2016 rec cmp range 125-120.. my option contract LTP will increase or not.. option contract
what will be react ..
F&O prices will reflect the bonus, so do not expect your Puts to increase in value.
On July 1st 2016 ITC issued 2:1 bonus but the stock price did not change proportionately. The reason for this it?
It did I guess.
The price on
June 30th : 246,
July 1: 252.
July 4: 245.6
July 4: 243.3
A bonus of 1:2 was announced so we would expect the price of a share to become 2/3rd as explained.
Yes, but this will happen when the bonus is effective i.e on Record Date.
Thanks for a detail understanding of how the CA effects the stock price. There were many confusions before i read your chapter, now i am confident on how this works and effects the stocks 🙂
Most welcome Leontia!
first of alll great efforts karthik sir you have done marvelous job
after reading your page , i came to know how stock price affected by corporate actions , sir my question is to you that as i am studying a company (ALANKIT LTD) which recently has announced sub devision of shares (stock split ) on 26-aug-16 , and last time they had announced stock split on 13.7.15 but when i saw company price graph i saw no price down fall after split please clear my doubt i have high hope from you and please tell me also what will happen if company declare bonus share and the date when price will effect ..
and thanks for making such awesome page on stock marketing knowledge
Thanks Deepender.
Most likely the price you are seeing in the chart is adjusted for splits and bonuses.
Hi Karthik,
Firstly thanks for all the brilliant consolidated beautiful explanations you have given for the corporate actions. This thread have provided the information’s i have been searching since some months. Kudos to you and your team.
Well my question is about the answer you have given to deepender above
1) How do they adjust the splits in the chart?. They will do for the historical prices ?. Like consider the price of a XYZ stock is 900 and the company have announced 1 :3 split . so the current price on record date will be 300(900/3) right?. so will they change the historical prices by the same ratio?
2) How is the notion for bonus and share split described?. Is it (2:1 or 1:2 ) for 2 share bonus for the existing single share?
3) Also, in the split ratio 1:1 how is the share price gets affected of a stock?
I’m glad you liked the contents here Sonthu.
1) Yes, the prices will be adjusted historically to reflect the recent corporate action to make the charts look consistent
2) 2:1
3) Share price will be divided by 2 and the number of shares will increase by 2
thanks karthik for the reply.
In reference to the third answer, the split ratio of 1:1 and 1:2 is the same right? because in both the shares will be split into two shares and the share prices divided by 2.
please let me know if i am incorrect
1:2 is the right way to express. And yes, shares are divided by 2.
I am not convinced with the split ratio ez of 1:1 .
split 1:1 , should mean no split at all. It should be always like , 1:2; 1:3; 1:4 ; 1:n , where n is any positive integer.
Pls. correct me if i am wrong.
1:2 indicates I get 1 share for every 2 shares that I own…but what if the company decides to give 1 share for every 1 share that I own?
Can you pls. justify based on the explanation in this chapter above :
Split Ratio Old FV No of shares you own before split Share Price before split Investment Value before split New FV No of shares you own after split Share Price after the split Investment value after split
1:1 10 100 900 90,000 5 200 450 90,000
1:5 10 100 900 90,000 2 500 180 90,000
Thnks!
khushbu
Can you explain demisting, what happens when a company wants to delist, how it affects stock price? .. Thanks
Can you also explain delisting* ( typo corrected)
Sure, we will try and add a supplementary note on this.
I received a message from NSE a few days ago that bonus shares for Wim Plast have been credited to my demat account but the same does not reflect on my zerodha account (under holdings). Kindly let me know when these shares will reflect in my holdings.
Kindly ignore the above comment/query since I’ve just been informed by the Zerodha support team that the shares will show up in my account once the new ISINs are activated by the company.
Happy to know that 🙂
It should happen today, request you to check your holdings t’row morning. Else, please do write an email to [email protected] .
sir today i sold 10 of my 20 IOC shares…(i bought these 20 shares on august 10th)
on sep 02(ex-date) company announced dividend Rs 8.50 per share
still i have 10 shares of IOC.
am i eligible for dividend now ?
if i am eligible for dividend will i get dividend per 20 shares OR 10 shares?
If you have sold the 20 shares today i.e around 21 st Sept…then you will receive the dividend for 20 shares.
Hi Karthik,
Please consider below example
Declaration Date-Friday, 7/26/2013
Ex-Dividend Date-Thursday, 8/8/2013
Record Date-Monday, 8/12/2013
Payable Date -Tuesday, 9/10/2013
If one has to target dividends then please suggest what is the minimum holding duration as per above example.
You have to make sure you are a shareholder before the record date. In order to do that you need to buy the share at least 2 days before the record date since the settlement is T+2 basis. So in this case by 8/10/2013.
Thank You Sir!
if I bought share before record date and sold after record date but before payable date, Then in that case I will be eligible for dividend?
Considering above example bought on 8/8/2013 and sold on 8/20/2013 then does dividend will receive to me?
You should, but its best to hold it till the payable date.
How to buy rights…?
What is the process?
How to apply?
Check this QnA thread – http://tradingqna.com/14647/how-to-apply-for-tata-motors-rights-issue
Thanks for the detailed information. Can you please provide the formula to adjust the stock price in case of rights issue. For example recently Karnataka Banks stock price got adjusted to 130 from 158 after the rights issue. Please let me know how to arrive at this price.
Ah, I’m not really sure. I will try and get you the info soon.
Whether dividend amount is paid to zerodha account or bank account
Gets credited to your bank account.
Hi , I have a confusion. Please look the below scenario.
Company:OIL
Announcement date: 28 Nov 2016
Ex bonus date: 12 Jan 2017
Record date: 13 Jan 2017
I bought shares on 11 Jan 2017 which is before ex date. But the shares won’t be on my account on record date considering T+2 period.
What will happen in this scenario? Kindly clarify
Thanks.
To ensure you are eligible for the corporate action, you need to be a shareholder 2 days before ex bonus date.
Ex bonus date: 19 Jan 2017
Record date: 20 Jan 2017
IF i buy shares on 17 Jan 2017, will i get the dividend, please answer yes or no, and clarify.
Yes.
Ex dividend date: 19 Jan 2017
Record date: 20 Jan 2017
I have bought x company shares one week back and if i sell on ex dividend date will I be able to get the dividend?
No, as the company looks for the shareholder’s register on the record date.
Ex dividend date: 19 Jan 2017
Record date: 20 Jan 2017
IF i sell on Record Date will I be able to get the dividend?
Yes.
Hi Sir, thanks for the article. my query is: Is BLOCK deals good or bad for a stock price? Thank you.
It makes no difference as they do not tend to affect the price movement.
For dividend ,TCS has record date of 24/1/2017 , so how much time it takes for money to credit in account after record date ? And dividend money comes to bank account or zerodha account ?
Money hits your bank account directly. Usually happens within a week…but it really is company dependent.
Hello Sir,
If my capital is 20,000/-, i purchased 100 shares of xyz company @ 200/- per share on 20/12/2016 & company declare bonus share of 1:2 record date is 28/1/2017 & after record date i will get extra 50 shares of xyz company, so now i am having total 150 shares of xyz company in my demat account. Suppose the market price is 220/- per share on 2/2/2017 Now if i sell all 150 share on 2/2/2017, How it calculated?
Is it 150 shares *220/- market price = 33,000/- ?
Please Reply
No, with a 1:2 bonus, you get 1 share for every 2 shares….therefore additional 50 shares, making a total of 150. But at the same time, share price also declines to about 133.
So you will still have 150*133 = 20000 worth of investments.
Sir, But i have seen that within 5 days like group ‘A’ stocks the price does not fall from 200/- to 133/- it will decline upto 185 (roughly). So now if i sell 150 shares @ 185/- then my capital will become 150*185=27,750/-?? Sir, ur doing great job!!
No Rahul, the effect of a corporate action is immediate.
if the sock split is 1:1 the face value will be changed from 10 to 10/(1+1)=5. But if the stock split is 1:5 the face value should change from 10 to 10/(1+5)=10/6. But u have mentioned 2. Can u please explain?
Both 1:1 and 1:2 are similar….I dont know why I mentioned 1:1 in stock splits (it is usually works for bonuses, will correct this as well). Anyway, in 1:2, FV is split from 10 to 5 (10/2)…and in 1:5, FV is split from 10 to 2 (10/5).
I am very beginner. All i have learnt is from your tutorials provided here. I want to practice it virtually before i land in real trading market. I mean i want to play where all are real except money which will be virtual. I have this question that if you have this feature.
We do not have that feature yet, for now I’d suggest you check out NSE’s Paathsaala – https://www.nseindia.com/NP/nse_paathshaala.htm
I have doubt that..
what will be the immediate next day impact on share market
1. Bonus
2. Split
3.dividend
4.Buy back
I mean share value increase or decrease?
Nothing really happens on the next day for Bonus, Split, and dividends. However if the offer details of the buy back is good, then the share price may move up. Co incidentally, TCS has announced today (16th Feb) that they may consider a buy back of shares before 20th Feb. It will be interesting to watch what would happen to the stock price.
Hi Karthik, In Bonus issue, does the FV of the share not get affected as it does in Stock Split. As you said, The bonus shares are issued out of the reserves of the company. That means company must be transferring funds from its reserves to its authorized share capital. Foe example: a company has an authorized share capital of Rs. 1,00,000. It has issued 10,000 shares with a face value of Rs. 10 each. Thus, its issued share capital is also Rs. 1,00,000.It has an accumulated reserve of Rs. 10,00,000. It decides to issue bonus shares in the ratio of 1:1 or “1 for 1” – that is, 1 bonus share for each share held. In this case, it transfers Rs. 1,00,000 from its reserves to its authorized share capital. Thus, its reserves come down to Rs. 9,00,000, and its authorized share capital increases to Rs. 2,00,000.Using this new share capital of Rs. 1,00,000, the company issues 10,000 new shares, each having a face value of Rs. 10, and gives a new share – the bonus share – for each share held. Its issued share capital also goes up to Rs. 2,00,000. This means there is no change in FV of the shares post Bonus Issue. Is it right?
Absolutely Mihir. FV does not reduce in case of a bonus issue, it is just a balance sheet readjustment. Both reserves and share capital are on the reserves side, so money is transferred from one line item to another.
What is the difference between bonus issue and stock split??
Hi Team,
This is a fantastic information on stocks and trading. I have a simple suggestion on the UI layout.
Most of the pages are read only but the header is taking more space while reading.
Why can’t you reduce the header height on scroll down and you may show the actual height on scroll up making the pages more readable and intuitive.
Thanks Uday. Will pass on the feedback to our UI designer. We do want to rehash Varsity with a completely new look etc. Hopefully should happen sometime soon.
Hi,
I had a specific query with respect to bonus share issues. What happens if one buys shares in between the ex-bonus date and record date? Since ex-bonus date is usually before the record date – what I have gathered is that the prices are adjusted in the market according to the bonus share issue proportion on ex-bonus date but record date is usually the cutoff date used by the company to register who is eligible for bonus shares. So, my question is: Do you get allotted bonus shares even if you buy shares after ex-bonus date (new adjusted price of the share) but before the record date? Ideally, that shouldn’t be the case but wanted to confirm.
Thanks.
You’ll have to purchase shares before the Ex-Date to be eligible for the bonus. I’ve explained it in more detail on this tradingqna link here: https://tradingqna.com/t/if-i-buy-or-sell-shares-on-ex-date-of-dividend-announcement-do-i-receive-the-dividend-what-is-the-record-date/174
Do let me know if you’re having any trouble understanding.
Cheers
Hi,
Like almost everybody here, I got confused on the topic of bonus shares. So if a bonus share is done at 1:1, which means that the shareholders now own 2x stocks each, but since the FV doesn’t decrease, therefore their value of investment should double, BUT, the total investment remains constant.
In essence, Selling price = 2 x Cost price.
When bonus shares are issued, 3 things happen –
1) No change in face value
2) Number of shares increase (based on the ratio of bonus issue)
3) Stock price is accordingly reduced
So net net the investment amount remains the same.
Why do the price of a stock drop on ex dividend date to the price of dividend which is to be paid?
If the dividend is small then the price drop is not very significant. Anyway, it drops because cash goes out of the company and gets paid to shareholders.
So if I buy shares after declaration of divident, bonus, rights etc but before ex-date, then will I get that benefit ?
Sir One more Question,
Are dividend incomes completely tax free ? Do we have to show it file filing tax returns ?
Yes, dividends upto 10L (from all sources) is exempted from tax.
Yes, you will.
Hi Karthik
If we get bonus shares of a stock, and we sell the initially bought shares, would that be recorded as a profit or loss if the LTP is below the price bought?
Eg. 100 shares bought at ₹100/Share [trade value ₹10,000]. If the share is trading at say 110, next after bonus of 1:1 you have 200 shares of each ₹55 [Positive Holding of ₹11,000]. So If I sell 100 Shares at ₹55 [LTP] after the bonus (which were actually bought at ₹100/share), will it be considered as a loss of 5500 as Zero Holdings? (while still having ₹5500 in your Positive Holdings, buying price of Zero! 🙂 )
Bonus issue is a fairly standard corporate action. You will have to declare the bonus issue and adjust the buy average accordingly.
Agreed! I am actually asking in taxation point of view, If at all we sell the shares initially bought and sold them before 365 days, would that be considered as a loss in out FY end statement?
No, on an adjusted basis it is still a capital gains of 10%. If you are holding the stock for under 365 days, then STCG is applicable. LLTCG is anyway 0%.
If my understanding of bonus shares and tax implications is correct, There is a FIFO (First in First Out) rules applicable for any stocks held in DEMAT Account.
So going back to example in “Sai Sreedhar” question, shares got doubled from 100 to 200 after bonus shares and the price was reduced from Rs. 110/- to 55/- after bonus shares.
So when a person sells only half of the shares (100 in his example), bases on FIFO rules, he/she is actually selling original shares which were bought at Rs 100/- (In the example given). Hence person would attract a capital loss of 100*(100-55) = Rs. 4500.
At the same time when person sells remaining shares (100) as well, which were bonus shares, the but price for those would be considered as 0 hence it will attract a capital gain of 100*(55-0) = Rs. 5500.
For Calculation of Short Term or Long Term, in first sale the buying date of original shares will be considered whereas in 2nd sale, allotment date of bonus shares would be considered as buying date.
To explain it further lets say you had bought 100 shares of price 100/- on “01-Jan-2017”. You got bonus shares of 100 on “30-Aug-2017” and the adjusted price after bonus share was Rs 55/-.
You now own 200 shares and the current price if Rs. 55/-
You sell 100 Shares on “10-Aug-2017” at Rs 55/-
Bases on FIFO rule, you have accrued a loss of 100*(100-55) = 4500/- which would be termed as Short Term Capital Loss and can be used to set of against any short term capital gain.
Remaining 100 bonus shares can be hold for more than a year from the date of allotment which is “30-Aug-2017” in this example.
So you sell these 100 shares at any date after “30-Aug-2018” there wont be any tax.
Yep, u r right. People try to do this, also called bonus stripping.
Sir, I have a question regarding buy back
Suppose the buy back price is 340, cmp is 333 and record date is 5/April/2017.
If I purchase 100 shares tomorrow and hold it till the record date within how many days would the buy back amount be given to us? And would it be transferred to demat account or bank account?
I’m not sure how long it would take for the funds to hit your account, but it would hit you bank account not DEMAT.
And what is the procedure to apply for buy back?
When a buy back is announced the company issues the letter of offer along with a tender form to all shareholders who were holding the shares as on record date, this form will be sent on your registered email ID and to your registered address through post which will detail the opening, closing date, price and number of eligible shares. Do fill this form and send the signed copy to us through email we shall have the order placed on behalf of you after the transfer of your shares to the concerned RTA and on the settlement date you will receive the money to your bank account. You can either tender only the shares you are all eligible or all the shares you are holding as on record date. The number of shares you are eligible will be accepted for sure but any number of shares more than that depends on the total bids received by the company.
Thanks a lot Roopa 🙂
Would all of the 100 shares be bought back by the company?
Depends on the buy back terms.
Thank you Karthik 🙂
Cheers!
shares bought in cum bonus date 23.03.2017 and sold on ex date 24.03.2017 before record date28.03.2017,shall i be eligible for the bonus shares
Nope, you need to be a shareholder by record date to be eligible for corporate benefits.
Quick question about Buyback of HCL Tech. As I understand, At the market price of Rs. 865 today, the stock gives you Rs. 135 return if it’s bought back at 1000. So if I buy now at 865 and get Rs. 135 in a buyback, that’s a 15.6% return in four months. I understand that not 100% stocks would be brought back, but even if they buy 50%, still we should be able to make a decent profit.
Is there some other risk which we should be aware of before building a position to tender shares for buyback.
Hey Samved, good to see you here.
The biggest risk (in general, may not be specific to HCL) is how the buy back would be perceived by the market participants. End of the day, buy back is ‘capital allocation’ by the company. If the market perceives that they are buying back shares at higher valuation, then that is a risk. The share price will comes down, you may not be able to tender all your shares, and eventually stuck with shares bought at a higher price.
hi,
on 27th april vedanta and cairn swaps the stocks.what might happen to vedanta stock price on that day
Depends on what the market thinks about the swap.
so ,
according to this article,
is it right to say that we should buy those shares of companies which give much dividends
Yes, if your agenda in the market is to make money via dividends.
Hi, I am new to market and I have doubt regarding Buyback. Take the Case of TCS for example, they have a buyback price of Rs.2850 with CMP 2320 and record date as 8 May. So, how will TCS decide that how much shares they will buyback from each reatail investor and when will I come to know of it i.e before record date or after record date ?
Thanks.
You will receive a circular directly by TCS which would contain terms of buyback. This will give you all the information you need.
Hi, I bought one TCS share to understand how this buyback stuff works…I haven’t received any notifications from TCS yet…Do I need to hold large number of shares to be eligible for buyback offer?
No, please do contact the registrar responsible for doing the TCS buyback to know the exact details (in terms of timeline).
Thanks a lot…I checked with my registrar….they said that they are yet to publish the details regarding the buy back.
Great! Good luck.
In your example, you have said if ITC is trading at 335 and it goes ex-dividend then it shall be slashed by the amount of dividend that has to be paid. here that was Rs. 5, hence ITC now shall trade at 330. BUt isn’t dividend a kind of reward which is basically given out of profit. If a company gives me dividend and simultaneously slashes the share price then in a way they are just returning my money back.
nobody has asked this question above and it seems like I have missed out something. Please if you can clarify this.
The impact on share price is especially true for very large dividend payout. You can ignore this for small value dividends.
But wont that be giving me money and then just taking it back from me at the same time?
Nope, as I mentioned, for small dividends the impact is not much. Also, remember dividends are tax free.
Hi,
I had some shares of JK Tyre, I see that the company announced dividend but I have not yet recieved it.
You will receive it soon.
HI. I understood all the topics except for buyback. How does the share go up if the company buys the share back from the shareholders. Could you explain that with an example.
This happens for 2 reasons –
1) When a company announces a buy back, it indirectly conveys to the market that the people who know the business really well (i,e the company itself) perceive their share price to be really undervalued….and the fact that they are buying back, suggests that they are optimistic on the future business prospects
2) When a company buys back shares, the bought back shares are eventually relinquished. This decreases the number of outstanding shares in the market, and hence the efficiency ratios of the company increases.
What is a PENDING corporate action and how does it affects stocks ?
Pending corporate action? Can you share the context please? Thanks.
I have 100 shares of SANWARIA, the stock is split, 1:1, But in the account the stock quantity is still showing as 100 only, where as it should be 200. Kindly clarify, when this will be reflected in my account
It will reflect when the stock goes ex bonus and the bonus shares are credited by the company.
I have 340 shares of Hindustan Petroleum at an average cost of Rs. 517/-. Due to Bonus issue 1:2 rate of share has been reduced to 375.10. In my holding number of shares are shown 340 whereas it should be 510 and average cost is showing 517/- whereas it should be 345. When it will be rectified? Can i rectify it myself? If yes, how?
The bonus shares will hit your DEMAT account as soon as the shares are released by the company.
There is hyperlink on word “Hindi” just below the title… Is this content gonna available in hindi too? would be really great for mass population of india.
We attempted to get this translated to Hindi, unfortunately not much success there.
Hi Karthik: Nice and simple explanation on various dates associated with some corp actions. I have seen in websites like Moneycontrol, Eco times etc the use of ‘EFFECTIVE DATE’. Is it the same as RECORD DATE? Since record date is a standard term why can’t people just use this rather than a non standard confusing name (i.e effective date) . Pl clarify. Thanks
I’d assume it refers to record date 🙂
Respected Sir,
Stock price drops at the ex-dividend date or after a day or two. In fact, the exchange itself makes deductions (as per my information) & next day stock opens up with new (dropped) price. This is what I was observing till now. After all, the effect of the Corporate Actions is immediate.
1) But, for past few months, I am observing that (almost) no stock is showing price drop at all, as if there has been no any Corporate Action. Is it due to strong bull market, or any other reason? Please Clarify.
2) Also, popular sites, like moneycontrol, are showing ex-dividend dates for stocks, but there is no record date. Couldn’t get what does this mean? What about dividend in such cases? Please clarify.
Thanks & Regards
James
1) No, the stock price will (has to) reflect the adjusted price. Can you please double check this?
2) I’m not sure about how MC deals with corporate actions.
Thanks Sir, that gave the protective layer of confidence to my foundation concepts. I am just wondering about this strange price behavior, (or maybe I am not able to figure out slip-up in my research).
An example, Bharti Airtel had 13-07-2017 as ex-dividend date. When, I checked NSE site for historical data, there is no significant price change to relate to –
12th close – 397.10
13th open – 402.25
14th open – 405.05
Similar for HDFC and (all) others.
Highly thankful if you clarify it for us all !!
Best Regards
James
Yes, if the dividend amount is small then it does not really move the stock much.
”When the stock goes ex dividend, usually the stock drops to the extent of dividends paid. For example if ITC (trading at Rs. 335) has declared a dividend of Rs.5. On ex date the stock price will drop to the extent of dividend paid, and as in this case the price of ITC will drop down to Rs.330. The reason for this price drop is because the amount paid out no longer belongs to the company.” Please explain the same again and what happens to stock price on record date ?
When the dividend is paid out, the stock adjusts to the extent of the price paid out. Nothing more to this I guess, Zinnia.
That i have understood that the price will decrease according to it. I wanted to ask that it particularly happens on ex dividend date only ?
Yes, it does.
I can’t understand the difference between Bonus issue & stock splits, bcz the impact of both on share price and its value is same.
Can you explain clearly with example if possible..!!!
In a bonus issue, the face value remains the same….where as in split, the face value is reduced to the extent of the split.
If any company issue Bonus share 2:1, then its prices will be half.
Then don’t it will affect the Nifty of Sensex if its in Nifty-50 or Sensex-30…..as they calculated by averages of them…!!!!
The effect will be taken into consideration.
Consider a company XYZ which announce Dividend x% on 01 January 2017 ,effective date is 01 march 2017
Case 1: if i bought 10 share on 01 February 2017
Case 2: if i bought 10 share on 25 February 2017
which is most profitable?
will share holder get equal dividend on both the cases?
Yes, equal dividends.
Why do the share prices fall, when the dividend is declared
If the dividend amount is not big, then the fall due to dividend is not significant.
Sir,
Regarding bonus share of Reliance Ind when the bonus shares issued will be credited to my a/c?
I guess the ISIN was not active, it should reflect next week. Can you please check with your broker’s support team? Thanks.
Hi Rangappa,
What is the Record Date of INFOSYS buyback offer ? Are they yet to announce that ?
I am hold Oct. option series ‘short straddle’ 920 strick price. If Buyback Record Date in between Oct. series, so what is the effect of Oct. option series.
It is yet to be announced I guess.
I am hold Oct. option series ‘short straddle’ 920 strick price. If Buyback Record Date in between Oct. series, so what is the effect of Oct. option series.
Buyback does not really affect much as the face value remains the same…unlike split and bonus issues (which tends to alter the lot sizes).
I don’t understand that, if buyback record date is 18-oct-2017, so share price will go down accordingly.
Than my holding Oct. option series ‘‘short straddle’’ 920 strike price premium price will be high, thus we make loss.
Please clarify.
A buyback does not guarantee the stock price going down. This really depends on the terms of the buyback.
As per SEBI guideline,
after how many days from announcement of record date will buyback record date come.
I think from the date of record date it should not take too long, less than 15 days. Check this – http://www.sebi.gov.in/sebi_data/commondocs/bback_p.pdf
Thanks for enriching information Zerodha. Thanks for the same.
I have one doubt regarding, why few companies don’t go for stock splitting like Eicher Motors share price is around 30000. Why these companies don’t go for stock splitting? Is it like they don’t want to encourage retail participation? What’s the company strategy behind this?
Splits and bonuses are a part of the corporate strategy. Like you said, some companies believe that they don’t need more retail holding in their portfolio, maybe they look for institutional holding….long term shareholding sorts. Hence they don’t venture into these corporate actions.
Thanks Mr Kartik.
Welcome!
Hello sir,
My doubt is based on dividend. I have shares of BSE Company.
Company announced dividend on 5/5/17. I didn’t get till now & tell me when i get dividend.
You will get it the day the company dispurses the dividend to its shareholders. You will receive this money directly to your bank id.
Hello,
What’s the difference between Bonus and Split? Per my understanding from this chapter, both does the same thing and it doesn’t seem any profit to shareholder apart from the quantity goes up which makes equity more retailable. I may have misunderstood something, please illustrate.
Thanks!
The bonus issue is considered a stock dividend. There is no visible difference to the shareholder…they are essentially the same, stock price decreases, number of shares increases. However, there is a difference from the balance sheet perspective. Will probably put up a note on this 🙂
Hi karthik,
Outstanding shares will increase when company announces bonus issue and stock split. Hence their Return on equity decreases and their book value also decreases right. Is this is a good or bad sign for that company.
Dilution is not great for the business, Yohanantham.
hello sir,
i have a doubt that if i bought shares from overdraft amount,then will i get the corporate benefits of those shares or not?
please clarify my doubt.
Yes you will, your OD is with the bank, not really linked to purchasing of shares.
sir, i am asking about od in demat(debit amount) leverage.will i get corporate benefits if i bought shares using leverage amount?
Are you talking about taking an overdraft by leveraging your existing shares in DEMAT? Are you talking about pledging of shares? If yes, then you cannot buy shares using the pledged amount. So no question of corporate benefits.
If a company announce bonus shares in some ratio, after bonus number of shares will increase in that ratio, Please clarify
1.) If I hold 10 shares ( I purchased 2 years back, No capital gain tax )
and company announces 1:1 and I sell shares, will that bonus shares come under short term capital gain ?
2.) share sell is based on first come first out basis, so what about bonus and also about split.
3. ) In case of buyback who will be the owner of that shares ( Is it company or promoter ? Infy has extra cash, from that cash they are buying so…
1) For the additional 10 bonus shares, the date of allotment of bonus shares will be marked as the buy date. 365 days hence these will be eligible for exemption of LTCG. HOwever, if you sell 10 shares out of 20, then the 10 that you sold can be offset against the initial 10 shares that you purchased. Work on the First in First Out’ basis
2) For split, it works slightly different as this is not additional shares that you are getting. Its the existing shares which are getting split.
3) The company will be owners.
Hi Karthik
I couldn’t get one point os subtopic “Buying Back shares”
1. Improve the profitability on a per share basis :- How does this happen. Even if the company buys some share the number of shares still remains the same right ?
When buyback happens, the shares are relinquished by the company. So fewer number of shares outstanding. For example, assume Profits before buyback was 100, the number of shares (before buyback) was 10. Now profit per share is 100/10 = 10
Assume 5 shares are bought back, profit per share –
100/5
= 20
Thanks for the clarification 🙂
Cheers!
Sir what if I brought stock after ex bonus date?
I know that I’ll not get bonus on this after reading this article but should I exit from this now and purchase after the effect of bonus in stock.?? Please help..
Thank you
It really does not matter, Dipesh as the stock price will be adjusted for the bonus effect.
I didn’t get it. What are the benefits of dividends? As I see your portfolio remains same.
Dividends are cash payout made by the company against the shares held by you. This is tax-free at the hands of the investor.
Hi
Kindly please let me know that if i have shares of infosys in my demate account and if i am not applying for buyback offer will i be in loos after price adjustement after the ex date or record date
No, not really. A buyback does not affect the price like a Bonus or Spilt would.
Sir I have a doubt that whether it is benificial for a company to directly buy back its shares or first bring bonus issue and then buy back its shares? What will be the tax implications?
The buyback is good if done with the right intent. It lowers the number of outstanding shares, which increases the financial metrics of the company.
Somewhere in this chapter, i have seen you mentioned “To ensure you are eligible for the corporate action, you need to be a shareholder 2 days before ex bonus date.
I have purchased infy on 26-oct-17, record date was 1-nov-17, am i eligible for buyback..?
Yup, as the shares are in your demat on 30th Oct.
Hey Karthik — Thanks much for your reply
I have 2.02 lakh of worth of infy shares, will i be under HNI or Retail in case i want to tender my shares in buyback offer
What would you suggest, should i make it within 2 lakh to inhance the chances of higher acceptance ratio
If I’m not mistaken, the acceptance ratio is fixed across all categories.
Yes corect
I want to know whether i fall under HNI or retail if i have just above 2 lakh worth of infy share??
Well, for the same of IPO application, that would be considered a HNI.
Hello sir,
Have any demo app of trading terminal for gain better practical knowledge before trading ?
We conduct demo of our trading platform, twice a day on youtube. At 2:30 PM and 6:30 PM. Check this – https://www.youtube.com/user/zerodhaonline . I’d suggest you do sit through this once.
Informative article, brief and clear explanations to readers doubts…
I came here looking for information that might help me decide whether to sell when there is a bullish trend (If I sell now I might get about 13 percent) or wait until the record date for bonus shares issue?
Glad you liked the content here 🙂
Unfortunately, no one will be able to help you with a call on this 🙂
Thanks for the knowledge sharing.
one doubt here…will the dividend pay is cash…will it get directly credited to your trading account?
Yes, its a cash payout, gets credited to your bank account directly.
Amazing job sir! May I know how long does it take for an order to get rejected ?
Its real-time, Sai.
Hi,
Just want to make sure my understanding is correct. In both 1:1 stock split and 1:1 bonus issue the number of authorized shares of the company doubles. Also the shares that are retained by the company also doubles.
Example
Say company has authorized 10 shares. 6 shares are retained by company and 4 are trading in market(issued float shares)
Total no of shares 10
Shares retained by company 6
Shares available in stock market 4
After stock split or bonus issue of 1:1
Total no of shares 20
Shares retained by company 12
Shares available in stock market 8
Am I correct?
Yes, that is correct.
And one more thing. Is buyback also optional like rights issue? i.e Only those shareholders who agree will be part of the buyback. The number of shares of other shareholders remains unchanged.
On reading tradingqna I found out that buyback is also optional.
Yes.
Yes, that is right.
Thanks. These training materials are very lucid. Great work.
Thanks!
In Varsity moduel 1 chapter 11 and point 11.4 of split of shares, when the ratio is 1:1 then 100 shares became 200 and when the ratio is 1:5 the 100 shares became 500. I think the ratio is wrong. When the ratio is 1:2 then 100 shares will became 200. Please clarify.
Yes, there’s no such thing as a 1:1 Stock Split. The chapter is now updated with the changes.
Thank you for pointing out 🙂
Which action is better,increase firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then increases to it to $40 in 5 years.
I’d say 20-25 in 6 months followed by 20-40 in 5 years.
Hi Kartik, I have one doubt about the bonus issues.You mentioned whenever a company issues a bonus, price of stock adjusts accordingly in the market. In your example, if a company allots bonus issue in the ratio 1:1 then price of the stock will fall down to half of its original value. But one such event happened in the history when reliance allotted bonus issue (sep-2017) in the ration 1:1 and instead downfall in the stock price, reliance share went up by 2 times. I am trying to understand the reason behind this, can you help with that.
Thanks in advance.
Rohan, bonus shares issuance is a corporate action, which has balance sheet impacts. Reducing the share price and increasing the number of shares is the only way it works. The price cannot go up. I suspect you are looking at the chart which is adjusted for the bonus.
Hello karthik,
I have one doubt about dividends,
You said that when the dividends are paid out the price of the stock falls to the extent of dividend paid,
but if the price of the stock falls then, is’nt it our own money the are paying back to ous, then whats the point in paying the dividend. Suppose i purchased just one stock before the ex-dividend date(of Rs. 200) and dividend paid out is Rs. 5 per share,
then on the date of dividend pay out the stock falls to Rs. 195 a share and i got Rs. 5 in bank as dividend since i only had one stock. Here i paid Rs. 200 and i got back Rs. 5 which my own money and the stock droped to Rs. 195 so they took 5 rs. from the stock and gave it to me in real money form, how is this an income then, i request you to please clarify this in detail as i cant seem to understand the concept.
Ishan, in most cases where the dividend amount is low, this won’t happen….as in the stock price dropping to the extent of dividend paid. However, if this is a special dividend….for example, a company declaring 50 Rupee dividend on a 200 stock, then you will see the dip in the stock price.
Sir, I have doubts about dividend yield. I was searching dividend yield of ONGC it is 5.1 (zerodha kite), around 3 on money control. Th
The difference could be because of the numbers – standalone versus consolidated.
Sir, I am extremely thankful to you for elaborating explanations in simple language. I have doubts about dividend yield shown on different site on same stock in same time with same current market price. For eg ONGC 5.10 (zerodha kite), 3.4 (money control). Power grid 2.25 (zerodha kite), 0.52 (moneycontrol). Reliance industries 0.62 (zerodha), 1.25 moneycontrol. Wipro 0.36 (zerodha) 1.42 moneycontrol. (1)Why did that happen. Which one is reliable.
(2) to calculate div yield we require annual dividend / current share price . Where to find annual dividend. Thanks.
Roshan, the numbers on Zeordha Kite is powered by Smallcase. Smallcase uses consolidated numbers (which is the correct approach)…however, I suspect MC uses standalone numbers. I guess you need to confirm this with them.
Yes, the Div yeild formula is correct. You will get the lastest dividend numbers on MC.
Thanks a lot sir.
Welcome, Roshan!
Sir what is difference between div % and div yld (%). How both are calculated?. Thanks.
Assume a company announces Rs.2 as divided on a share which is trading at 50/- per scrip and has a face value of Rs.10.
Dividend % is 2/10 = 20%
Div yeild is 2/50 = 4%
Oh great sir.. got it in just four lines for that I had search lot many web pages. 1. What these two things indicate. 2. which one is more important 3. which value should be consider before investing in stocks. Thank sir.
These two are essentially the same – gives a perspective of how attractive is the dividend payout. I personally prefer the Div yield as the dividend % is quite pointless 🙂
Okay.. thanks..
Welcome!
Sir, I have few queries regarding EPs (earning per share). (1). Do the EPs changes only after annual / quarterly report. Or it changes daily. (2).Among 4 – 5 types of EPs which one is most important
(3). When the quarterly report available to investors for example for the quarter ending in June after how many days usually report get published.
Thanks
1) Yes. However, based on the quarterly numbers, you can project the forward EPS
2) Diluted EPS
3) It is almost on an immediate basis.
What is face value ?
Difference between face value and share price?
Face value is the notional price given to a share at the time of creation. Typically, it is Rs.10/-. Share price, on the other hand, is driven by the market.
What is price of one share called?
Thanks to you and varsity team.
That would be called the share price, Ritik.
What will be the impact of stock split on future and option price. For ex if I have bought 1 lot(600 qty) of INFY Mar 18 future at 1150/- and stock split 1:2 then will it show 1200 Qty and the current price as we see in stocks.
Yes, the contracts will get adjusted and NSE will send out an official circular for this with all the details.
Kartik….
Can you explain stock Future price adjustment….
Eg- Vedanta Limited went Ex div( Rs17) on 06/11/18. On 05/11/2018, I have sold Vedanta future at 223.30 and covered position on 06/11/18 at 212.5…Will you please explain my net position?
Please let me know if there is any video lessons of varsity anywhere and by anyone.
P.S. People are talking about it .
We have few videos here – https://www.youtube.com/user/zerodhaonline
Thanks.. means EPs changes daily !!.. where could one find list EPs (apart from capital market)
Yes, since the stock price changes every day, so would the EPS.
Ok sir.. I have one query, formula for EPs is EPS = (Net Income – Preferred Dividend) / Average Outstanding Shares. Net Income,Preferred Dividend and Average Outstanding Shares are declared quarterly and annually (I guess). So how daily changes in stock price affect EPs.
Sorry, EPS does not, but the Price to Earnings does.
Thanks sir..
Welcome!
Hello sir, I have searched a lot but not able to find out January 18 to march 18 quarter result. Latest results shown of Dec 2017. Please suggest where to find Q1 2018 result.
I’d suggest you go to the website (investor section) of the company you are looking at and look at the results.
Ok.. if possible please suggest some source (website/ magazine) from where I can get list of recent eps of stocks. Visiting each and every company (in NSE 50 or in bse30 ) reading financial.. bit tedious. Hope you understood what I mean to say .. thanks..
If you are using Kite, then you can click on the stock widget and get the EPS information. More on that here – https://kite.trade/docs/kite/marketwatch/
How do i know the face value of a share ?.
Does it change every AGM or with CMP of the share or Market cap of company or with Free Float Market Cap or is it fixed?
Is there a link on NSE or BSE where face value of each company share is mentioned?
The easiest way to check this by looking at the NSE’s page, for example here is the stock page for Infy – https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=INFY&illiquid=0&smeFlag=0&itpFlag=0
FV changes whenever there is a bonus or split.
Thank you .
Really appreciate your your explanation- clarity ,style & practical example.
Happy to note that, Siddharth 🙂
Keep learning!
Hi, the ex-dividend date for ITC was 25th May 2018. By when should I expect the dividend to be credited in my associated bank account? Thanks in advance,
You should get the dividends as soon as the company transfers the funds. This usually happens within 10-15 working days.
Thanks Karthik!
Welcome!
Hi Karthik,
In continuation to my earlier query, I wish to inform that I have yet not received any dividend for ITC or for that matter even TCS (though the bonus share has been added to my account). Could you please clarify if there is some concern regarding connecting the bank account so that crediting of the dividend is smooth.
Hi Sir, thought you might have missed my query, hence sending it again…
Hi Karthik,
In continuation to my earlier query, I wish to inform that I have yet not received any dividend for ITC or for that matter even TCS (though the bonus share has been added to my account). Could you please clarify if there is some concern regarding connecting the bank account so that crediting of the dividend is smooth.
Gaurav, ideally you should check this with the company directly. Please speak to the investor grievance department and you will know the reasons.
Thanks Karthik, what should I quote while contacting the firm. Where can I find the information that needs to be quoted.
Gaurav, just let them know you are a shareholder as on record date but have not received the dividends. Ask then why and when you can expect the same.
Dear Sir,
I have doubts regarding dividend and rights issue.
1. You have mentioned that dividend will be paid to the shareholders listed in the register of the company. Where will they get this data from, i.e., from the exchange or various brokers?
2. It has been written that rights issue is like a second IPO for new project or development or expansion. Now, before going ahead with this what are the mandatory steps to be followed by the company, for example, evaluation of the new project, exchange permission etc. Kindly elaborate.
1) They will get this from the RTA (Registrar and Transfer Agents)
2) Usually, the same set of steps which are used to evaluate the need to raise money for IPO are adopted before going in for a rights issue.
Thanks for clearing the doubt. You are the best.
Good luck and happy reading 🙂
Sir, if i sells shares of a company on the next day to ex dividend date or record date but before the dividend payout date, then will i get dividend ?
Yes, you would.
In terms of shares of a company owned, there is no difference between 5:1 bonus & 1:5 split ?
Hmmm, sort of. The changes would appear in the balance sheet.
So if I buy a stock on the next day of the Dividend declaration date, I’ll get the dividend?? As I bought it before the Ex date?
Yes, you will.
Sir,
I am placing buy order ( i.e predicted pattern breakout price) in limit order but which is executing at present price, so please let me know how to place order predicted in advance( in day trading) so that I should get ordered price or little near price (For example now share price is near Rs.1500, I want to buy at Rs 1035, so my requirement is to place order now at predicted price 1035 so that order should execute when price reaches 1035 or at very near price
Kumar, you just need a Buy limit order here, that will suffice.
How is the opening market price of the stock derived on the exdate in case of bonus/split.Is it calculated by the exchange or determined by the market ?
It get adjusted to the extent of the factor of the corporate action.
Possible impact when debentures are raised??
This really depends on the cash requirement situation of the company, Sana.
In case of buyback , the number of shares would reduce , but would there be any effect on price then ?Will it increase ?
If the terms of buy back is good, then usually the stock price goes up.
Hi Karthik, Thanks again for the great article. Can you please explain more about Face value, how it is determined/calculated? and how the change in face value affects the share price? Thanks in advance.
Face value is the notional value of the share assigned at the time of creation. Common face values are 10, 5, 2 etc. The face value is useful when dealing with corporate actions like the bonus, splits, dividends etc.
I had omkar speciality chemicals last yr and it got demerged into omkar and lasa (new).
But lasa is not reflected in my last year profit loss statement. No reply to the support mail also. its already more than 50 days. I had to create a manual profit loss statement for tax filing. what should i do now ?!?!? please advise.
We are currently running a recalculation in our new back-end for all the corporate actions that happened from FY 2017-18. Once this process is completed, your profit and loss statement will be updated correctly. We might need another couple of weeks to complete this process. It would be great if you emailed me at nakul.k[at]zerodha.com and I’ll try to get this fixed for you.
Thanks. I have emailed u the details.
Hi Kartik,
Thanks for such wonderful content.
I have some confusion though.
How does Stock Split and bonus differ from each other then?
Both are used to reduce the price of the existing share. Even if I get a split, I will have the same value, same goes for the bonus share. I still end up with the same value.
In a stock split, the face value of the shares reduce and in bonus issue, the face value remains the same. There are few more changes from the balance sheet perspective, I guess you will understand that when you read more about the balance sheet.
Dear Sir, After reading through the concept of “Buyback” I put an effort to make an analysis of my own but there are some errors to be fixed, kindly go through the analysis and help me.
TCS successfully made a buyback of it shares worth RS.16000 crores on 21st sep 2018. https://economictimes.indiatimes.com/markets/stocks/news/tcs-completes-rs-16000-crore-share-buyback/articleshow/65970847.cms
On a approx one share costs Rs.2000-2100
Hence 16000 crores/2000 gives 8 crore shares (western system= 80,000,000)
This translates to 80M shares.
On zerodha kite, on 21st sep the volume on tcs is mere 4.5M.
Q1.) What happened to the rest of the shares? why aren’t they showed? Is this data in-accurate or misleading?
Q2.) After a buyback the expectation for the company is to move in the positive direction. Here in this example there is constant falling in the stock price. What’s the reason for this?
Please correct me if im wrong anywhere in my analysis, It would really help strengthen my knowledge.
Thank you 🙂
The shares are tendered offline and not online 🙂
The buyback does not guarantee that the shares will move north. It really depends on the term of the buyback.
Thanks for answering sir. 🙂
Good luck, Daniel.
Kartik….
Can you explain stock Future price adjustment….
Eg- Vedanta Limited went Ex div( Rs17) on 06/11/18. On 05/11/2018, I have sold Vedanta future at 223.30 and covered position on 06/11/18 at 212.5…Will you please explain my net position?
Dear Karthik,
I want to know that, is it possible to company increase ‘Face Value’ once it is Split or Bonus issue is done.
Possible, but companies rarely do that.
Thank you very much and your knowledge level is unbelievable.
Good luck, Bharath! Happy learning 🙂
Please help me with specific of buyback record date.
1) say for example that record date of a buyback is on 30 november that is friday. When can i buy latest such that I will be elligible to particpate in the buyback? If i buy them on wednesday that is 28 november, would i be elligible to participate in the buyback? Which is the last date on which if I buy, I would be elligible to participate in the buyback?
2) When i talked with zerodha support, the guy said something like this that even if you buy one day before, you will still be elligible to participate in Buyback, as the shares are in some pool account . Please Clarify
3) say for example that the record date is on 30 november that is friday, and i already have shares in my demat account. If i sell those shares on the same date as the record date, will I be still elligible to participate in the buyback? Which is the earliest possible date when I can sell my shares and still be elligible for the buyback
Thanks
Looking forward to your answer
Looking forward for your reply Kartik
Please Help
Regards
Tathagat Shah
1. and 2. To be eligible for a buyback, you need to have the shares in your demat account on the record date. You will have to purchase the shares before the ex-date. If the ex-date is say, 29th November, you will be eligible to offer your shares bought on 28th November. You will not be eligible if you buy on the ex-date (29th November).
3. You will still be eligible for the buyback in case you sell on the record date (30th November). Record date is the earliest possible date to sell and still be eligible.
Thank you very much
Really appreciate your efforts
Arvind LTD has been demerged to arvind ltd (textile) arvind fashion and lastly arvind engineering… Split is for every 5 shares of arvind LTD one will get 5 shares of arvind fashion and for every 27 shares of arvind LTD 1 share of engineering group…how will this split work if I have 10 shares of Arvind LTD ? Will I not get anything for Arvind Engineering ? Will I only get additional 2 shares for Arvind fashion ?
As per the scheme of demerger, the shareholders of Arvind Ltd will be entitled to an allotment of 1 share of Arvind Fashion Ltd (AFL) for every 5 shares held in Arvind Ltd, and 1 share of Anveshan Heavy Engineering Limited (AHEL) for every 27 shares held in Arvind Ltd.
A person holding 10 shares of Arvind Ltd would get 2 shares of Arvind Fashion Ltd (AFL) and there would be cash settlement for 0.37 share (10/27) of Anveshan Heavy Engineering Limited (AHEL). You might have to contact the company to know when this will be initiated.
Thanks a lot for the response Nakul.I do not hold any shares of Arvind . I had asked to understand the process for my knowledge.Thanks again for the clarification
Hi,
I received a mail post the Arvind demerger stating I will be getting 4 Arvind fashion limited shares. My question is when will these 4 shares reflect in my zerodha account.
Unfortunately, there is no timeline on this Niranjan. You will have to speak to the company itself for this.
Hey Karthik,
First of all, highly appreciate this great initiative!
Could you please specify the difference between the Face Value of the stock and the Share price?
Thanks in advance!
Face value is the nominal value of the share assigned at the time of creation of the share by the promoters. Usually it is Rs.10 or Rs.5. However, the share price is driven by the market.
What happens if a shareholder owns 1 share, and the bonus issue is 1:5 (1 share for every 5 shares held) ?
Would he get proportionate shares?
The proportionate amount will be cash settled, Shrey. The shareholder would receive cash equivalent to 0.2 shares
Respected sir, zerodha varsity is very good initiative towards stock market education. Thanks for your help to novice like me who are aspire to come in the market.
Sir, I read about the news that you are going to launch app also for the same.
So sir my request for you that please add small animation videos in the app to understand concepts deeply because ACTION speak LOUDER than WORDS.
Again thanks for the your help.
Regards.
Have a nice day.
Thanks for the suggestion, Kiran. Hopefully, we can do things like that in the subsequent release.
Hi..thank you for explaining these topics. I have some doubt regarding dividend payout.
What if I own a share of the company before the ex date(makes me eligible for dividend payout) but decide to sell the share before the payout date! Would I still receive dividend in this case?
Chetan, you just need to ensure you are a shareholder on the record date and you will be eligible for the dividend.
Suppose I have 1 share of Rs. 100. Company gives a bonus issue of 1:1.
1)Now, I have 2 shares of 100 each OR 2 shares of 50 each.?
2) How does price correction takes place ? In this case how does price reach 50 ? Its done by company OR automatically via market trading? Can any formula relating to reserves, share-capital and market price of share clear this concept of price correction showing price reach 50 from 100 ?
1) 2 shares, 50 each. Your investment value remains constant, but the number of shares change
2) This is taken care by the exchanges.
Dear sir, NTPC record date 20.3.19, Ex bonus date 19.3.19 if I purchase share on 18.9.19 will those shares will be eligible for bonus ?
Sorry Please read 18.3.19 not 18.9.19
Got it 🙂
Yes, Roshan. You will be eligible.
Thanks a lot sir..
Welcome!
Good morning sir, I have one confusion suppose a company declare bonus / dividend, record date 5 Jan
Ex dividend / ex bonus date 4 jan
1. One has to purchase share AT LEAST on 3 Jan (hope I am correct) will that fulfill T + 2 criteria
2. When can one SELL the share after getting benefit of bonus / dividend, is it on record date i. e 5 Jan or 6 jan
1) Yes, you need to esure that you are a shareholder by record date, which means you need to have purchased the shares 2 days prior
2) Yes.
Thanks, in that one case can purchase share on 3 jan and can sell on record date 5 jan
Yes, make sure your on the list of shareholders on the record date.
So I can sell on record date
Yup, you can.
Thanks..
Hello Karthik,
I have a doubt in the following example
“When the stock goes ex dividend, usually the stock drops to the extent of dividends paid. For example if ITC (trading at Rs. 335) has declared a dividend of Rs.5. On ex date the stock price will drop to the extent of dividend paid, and as in this case the price of ITC will drop down to Rs.330. The reason for this price drop is because the amount paid out no longer belongs to the company.”
so my doubt is that why the price drops from 335 to 330, shouldn’t it rise because the seller of ITC are foregoing their dividend of rupees 5 which they should ask the buyer to pay extra for it to compensate for that 5 rupees and pay a total of rupees 340 to buyer
Aryan, actually for small dividend amounts this may not really happen. The fall in price is quite evident when special dividends are paid out. Yes, if the company issuing the dividend is good, the price does tend to go up.
Thank you, Karthik for replying back
so it generally happens that the price rises if the company announces a good dividend, right?
Yup, that is the expected outcome. But then it also depends on the overall business prospects. Remember a company that makes a loss can still pay a good dividend (like many PSUs). So you really need to look at things from a larger perspective.
So Karthik, what happens when such scenarios happen where a loss-making company like PSUs having a good cash reserve still manages to give a good dividend, will the price of that company drops or rise(as a general view of yours) and second thing why will the company still announces dividend when they are in loss?
Yes, the company can still announce a dividend even if they make a loss, as the dividend comes from reserves. This is true with large well-established companies where the growth prospects are usually low and the company is better off giving a dividend to shareholders rather than hoarding cash.
You cannot have a generalized opinion on this. It really depends on the circumstances of the company issuing the dividend 🙂
The following is an excerpt from the news column on a Corporate action undertaken by the said company.
The company has fixed June 27, 2018 as the record date for the purpose of ascertaining the eligibility of the members for
sub-division of equity shares from face value of Rs 2 each to Re 1 each and issue of bonus equity shares of Re 1 each
in the ratio of 1:2, i.e. one equity share of Re 1 each for every two equity shares of Re 1 each (i.e. after sub-Division of shares).
My query is regarding the implication of actions like Stock split/Bonus share issuance on the company’s Equity Share Capital.
Does it change with respect to Share capital, Number of shares?
Yes, this has a direct impact on the number of shares. Both stock split and bonus increase the number of outstanding shares.
I can’t understand what is difference between stock split and bonus issue.
They both are leading me to the same results.
They are somewhat similar.
Hi Karthik! I’ve got 2 questions.
1. When we short the cum dividend shares, while squaring off, should we pay the market price+ dividend for each share? Not paying dividend doesn’t make sense as everyone would short considering the certainty in the reduction of the market price of shares. (Or the fact that everyone thinks about shorting but no one is willing to lend the shares for shorting help in overcoming this idea?)
2. What *exactly* do we mean when we say company buybacks the shares? Who gets to control them (certainly not the promoter/Angels/VC/PE investor right?) Does the company have a specific Demat kind of account to store these shares (are these called treasury shares?)
Thanks 🙂
Sarath, this does not matter because when you short, you do not carry forward the position in the spot as you will have to square off the position on the same day. In futures, it does not really matter.
Yes, the shares are bought back by the company itself. Yes, the company too has a DEMAT account.
I am an NRI . Recently Wipro had announce bonus 1:3 ratio. I had 200 shares which made my share as 66.66 so I received 66 full shares and got Rs175 as fractional bonus trust entitlement for the 0.66 portion. I got 147 in my account after deduction of 28 Rs TDS. I am filling ITR2. I have following queries. 1. whats the taxation angle on this fractional bonus cash that I received? someone told me the fractional bonus price if paid as part of bonus trust is not taxable. please advice if this is correct as the TDS has been deducted on same. 2. Where do I need to report this income in ITR2? which section? 3. While claiming TDS deducted for this fractional bonus in ITR2 now you need to mention the gross value and choose the type of income from a drop down menu. the options are income from other sources/Capital gains/exempt income. which one do I select for this fractional share payment? Thanks
1. The fractional bonus you have got it against your holding. If it is long term holding it is exempt upto Rs 1lk else STCG at 15%.
2. Under capital gain, either under STCG or LTCG based on holding period.
3. Capital gains.
Thanks a lot Nitin,
I am confused – to treat them as long term or short term
I had aquired 100 original shares in dec 2014 and since then bonus has been declared twice first 1:1 on June 13 2017 to make them 200 and again 1:3 on March 6 2019 to make them 266.66. this fractional share for 0.66 cash got credited on 7th March 219.
how do I arrive at the acquisition value and calculate the CG.
Hi Peeyush, my bad. I think it is best to consider them as STCG. Typically with bonus shares, we take the bonus credit day as the date of acquisition and price as 0. Instead of shares you got money, so I think you should show this as STCG.
Thanks for clarification Nitin,
It would be great if you can update this section covering also how to arrive at cost of acquisitions in case of various corporate actions normally for STCG and LTCG and also taking in to consideration the grandfathering cause as there is a lot of confusion which investors might have for shares bought before Jan 2018 and corporate actions like bonus/rights issued after and before Jan 2018 scenario
We will try and do this, Peeyush. Thanks. Meanwhile, I’d suggest you check this module on taxation – https://zerodha.com/varsity/module/markets-and-taxation/
Hi Nitin,
While updating the Capital gains section in ITR2 there is one more confusion regarding this bonus credit share deposit in my account. Has Wipro credited this amount to me after paying STT ? how much will be the STCG tax in this case?
I think the STT would have already been paid as the bonus shares for fractional entitlements were allotted to a trustee appointed by the board. The trustee, in turn, would have sold the shares at the prevailing market rates and distributed the net sale proceeds after adjusting the costs and expenses among the eligible shareholders in proportion to their fractional entitlement. You can refer to this announcement for more info. The STCG in your case would be charged on the total cash amount you have received. Hope this helps.
I have a question for which again I couldnt find clarification.
I had bought Bharat Financial inclusion 600 Shares in december 2012 @ 170 per share
now after being merged with Indusind Bank I have received 383 shares of IndusInd bank effective from July 4th 2019
my questions are
1. How does one calculate the cost of acquisition of the Indusind share?
2. Will the grandfathering clause apply as original shares of Bharat finacial were aquired before Jan 2018 but the merger happened after that? could not find a sound clarification on this.
3. What will be the capital gains in this case if I sell them now ?
Thanks again for this wonderful forum to educate investors and clear their doubts.
1. The cost of acquisition will be the original cost of acquisition of the amalgamating company. In this case, it’ll be Rs. 266.32 for each share of Indusind bank. Calculated as (600*170)/383. Refer to Section 49 (2) for more.
2. Yes, the grandfathering clause will apply as the period of holding will be the original period of holding of the amalgamating company. Refer to Section 2 (42A) (c).
3. The capital gains will be the sale price minus the original cost of acquisition or the high as on 31st Jan 2018 whichever is higher. The cost of acquisition will be the sale price in case the sale price is higher than the original cost of acquisition and less than the high price as on 31st Jan 2018. Refer to Section 112.
Hi Karthik,
How buy back of shares will Improve the profitability on a per share basis?
Please explain
Buyback reduces the number of outstanding shares, hence the profitability increase on a per share basis. For example, EPS is calculated as –
Net profit/Number of outstanding shares. When buy back happens, the number of shares reduce, hence the EPS increases.
Thanks a lot Karthik..!
Good luck and happy reading 🙂
Presently on expiry if future long or short contract is not closed on expiry , will exchange settle it with difference or holder will have to buy those shares of lot.
Regards
P.B.Gupte
Based on your position, you will either have to bring in cash or margins, Pradip.
Hello Karthik Sir,
Can you please elaborate more about buy back?
Like who will be eligible for buyback?
If certain individual buys the share after buyback is announced then will he be able to sell his share to company?
And as in dividend and bonus share will there be cut off date?
What is buyback through secondary market route and tender route?
How to calculate acceptance ratio?
Regards,
Omkar
Buyback is just like a corporate action that a company can announce. All eligible shareholders can opt to participate in this. Yes, a cut off date is applicable for this as well. The acceptance ratio is computed by the company itself, not sure about the math but I guess it is not too complicated.
Hey Karthik,
I have a doubt regarding cum dividend and ex- dividend price.
Suppose I purchase shares of a company after the date of AGM but before Ex dividend date the share price is considered to be cum dividend. But actually the dividend would be for the previous financial year. How will the amount of dividend that i receive as a shareholder of a company on a later date than of a period which the amount is being distributed be accounted for?
I mean I was not a shareholder of that period for which the dividend is distributed. Is it like I am paying for the dividend that I am receiving?
Thank you sir for the informative article.
1. Can you please explain below terminology with an example:
Entitlement date, Ex-date, record date of a dividend?
2. Other than Split, bonus, right issue, buyback, which are other corporate action events impact existing stock position?
Thanks in advance.
1) Explained in the chapter itself, right?
2) M&A has a an impact on the stock position.
another question on buyback,
how buyback impacts on the stock price. As per my understanding, buyback is nothing but selling the position to the company at defined rate. For e.g. I have 100 units of stock ABC @ 10/- in my position. Company announces to buy back @12/-. On the event date, out of 100 units, 30 units bought back by the ABC company @12/- where 2/- will be treated as profit in my books of account. However final position will be 70 units @10/- hence no change in security price.
Please clarify.
What you have explained here is partially correct. However, your holding average after the buyback might not remain the same in all cases. The average price of your holdings is calculated on FIFO (First In First Out) basis. Consider a case where you had bought the 100 shares in two different transactions:
1) Buy 30 shares at Rs. 14.65
2) Buy 70 shares at Rs. 8.00
In this case, your average price for 100 shares is still Rs. 10.00. When 30 shares are bought back by the company at Rs. 12, the 30 shares you had bought first at Rs. 14.65 will be moved out causing a loss of 2.65. The remaining 70 shares in your account will remain at Rs. 8.00.
Sir , do company release announcement for interim dividends ? and why companies do share consolidation?
Yes, they do because as a public limited company, they are obligated too.
Split Ratio Old FV No of shares you own before split Share Price before split Investment Value before split New FV No of shares you own after the split Share Price after the split Investment value after the split
1:2 10 100 900 90,000 5 200 450 90,000
1:5 10 100 900 90,000 2 500 180 90,000
Hi,
in this table, 1:2 split—-shouldnt the number of shares post split be 50?
Let me recheck this, it’s possible I that I’ve made a typo.
Hi Karthik,
How issuing of bonus will stop reserves from swelling? As you mentioned earlier that one of the reasons can be swelling up of reserves for which a company can issue bonus shares. Bonus shares are issued in case of 1:1 on additional for the another and share price gets halved then what is the role of reserves here as they are not getting utilized?
Will probably do a write up on corporate action and balance sheet impact soon, Robin.
Sir,If a company announces bonus share, it is given that the share price gets reduced accordingly so that your total investment remains same.. that is, if bonus shares are issued in 1:1 ratio and suppose if price before bonus issue was Rs.1000, then it will get changed to Rs.500 . But, when I checked past data of many comapanies that have issued bonus shares, I couldn’t find share prices getting reduced… I checked both record date and announcement date and all the dates around… Taking an example , Infosys announced bonus (1:1) on July 13 2018 and ex-bonus date was September 4, 2018.It was trading around Rs.650 on July 13 and it was trading around Rs 700 on September 4.. According to theory, the share price should have fallen to around 350, but it didn’t hapoen…For the sake of checking , I checked price from July to October 15 and the prices never dropped below even 650 …why this happened so ? Same was seen in almost all the companies I checked… Could you please look in to this issue and explain ?
Thats not possible, Janko 🙂
Btw, the charts are cleaned up for corporate action, so the chart will look continuous, smooth and nice,
Thanks a lot ( ◜‿◝ )♡( ◜‿◝ )♡
Welcome 🙂
I have two queries,
1) In case, I own a X company preferred stock which pays a good dividend on quarterly basis, I went long on this stock for say 5years n now i wish to sell it , so will i have to give away the dividends i recieved throughout the 5years along with share?
2) In splitting of shares the face value changes along with market value, want difference does FV make and how come it is attractive to investors(shareholders)
1) No, the dividends are for you to keep
2) It does not make any change. FV is considered only for corporate action purpose
What do you mean by ” charts are cleaned up for corporate action”?
Adjusted for bonus and splits I mean.
Why the Zerodha does not provide the services for Buy Back announced through Open Market????? Is it not impacting the shareholders who are holding the particular shares through zerodha, financially????? And if it is impacting the shareholder, due to non-availability of such services, who should be held responsible for lack of providing such services.
Buy back is through open mkt itself, the company purchases shares from the secondary market and you wouldn’t know who you’re selling it to, the rates are the prevailing market rates only. Also what difference does it make if one were to sell it back to the company or to any other person?
Whenever a company decides to pay the dividend, the stock price decreases by the same amount as the dividend. How is this possible? Am I missing something here?
We know that once the IPO happens, the shares are no longer related to the finances of the company and their price are only governed by market forces (supply and demand). I hope this statement is correct! Moreover, once the dividend is paid, there could be possible buyers (and sellers) who’re willing to purchase the stock at the same price, in which case the price shouldn’t fall.
Please can you explain?
Whenever a company decides to pay the dividend, the stock price decreases by the same amount as the dividend. – This is true wrt to special dividends, not the regular dividends, Gaurav.
Yes, that is correct.
First of all, amazing work. Thank you so much, this information is helping to understand about the stock market.
Bonus shares:
========
I have a question about bonus shares.
When the company issues bonus shares, the total value of the investment remains the same, and that means the face value of the share has gotten down is what I understand(as the total value remained the same even after getting more shares).
But in the end, it is said that the face value remains the same. How’s that? If it is so, and the face value remained the same, then after the bonus shares received, shouldn’t the shareholder’s worth of investment increase? But in the examples given the value remained the same!
Please explain.
FV remains the same, but the share price is proportionately reduced. However, in a stock split, the FV is reduced but even here the share price is proportionately reduced
Sir My doubt is with respect to bonus shares. Total shares are 100000 and Promoter holds 70000 shares and Public hold 30% of stake(I.e 30000 Shares) and Face value is 10 and company wants to issue bonus with 1:1 ratio. I
A) does reserves means accumulated amount from profits or any special account maintained for share capital
B) It is very easy for company to issue bonus shares as it requires 30000*10=300000 to issue bonus shares to public. am I correct here.
c) will promoters also get bonus shares as they hold 70000 shares.
Please explain how promoter holding affects when bonus, splits or rights issue happens.
1) Yes, reserves are built by accumulating profits year on year
2) Yup, the money goes from the reserves
3) Yes
Promoter’s holdings are impacted the same way as any other shareholders.
i didnt understand the concept of Rights Issue. please help
Check this – https://zerodha.com/varsity/chapter/supplementary-note-ipo-ofs-fpo/
In case of Rights Issues,
From where the shares are transferred to subscribers.
does it mean promoter is reducing his stake and offering it to existing share holders. or new shares are created. If new shares are created please tell me the source of funds for it. Please help.
New shares are issued and capital is raised from the existing shareholders.
Sreenivasulu Govindu says:
May 19, 2020 at 12:04 pm
In case of Rights Issues,
From where the shares are transferred to subscribers.
does it mean promoter is reducing his stake and offering it to existing share holders. or new shares are created. If new shares are created please tell me the source of funds for it. Please help.
In this case Market Cap increases?
Who have not subscribed will be at loss?
Shares are issued and capital is raised from existing shareholders. Thats where the funds come from.
In case of rights issue, Market increases without adding any value in Production. Does not it a loss for already existing share holders.
Any form of additional equity is dilution.
Dear Sir,
What does Promoter is selling stake to reduce debt of the company.
If Promoter is selling his stake then money goes to him but not to the company, then how companys debt will be reduced.
If promoter is selling his few shares and using this money to reduce the debt then remaining share holders gets benefit without any effort or loss to them. But promoter loses lot of money.
Please explain how company can reduce the debt by selling few shares also explain how shareholding patterns reacts to it.
Please explain using Bharati Airtel or Reliance Jio as example.
Thanks in advance.
If the debts mount, the promoter can do this as he is the majority stakeholder besides as a promoter, he and the team are responsible for actions the company takes.
Hi Karthik, can you please clarify on my below question?
Why stock price goes up when company announces delisting from bse/nse? With that fear people should sell those stocks right?
Let us say yesterday Hexaware announced delisting and announced buy back at 285/- per share and stock moved up by 20% to 311 around. But many people would have had higher buying average like say 350/-. And after board meeting if delisting is approved at what price will they buy back? Stock went up due to a fact that company needs to buy back shares at any cost(obligation) so investor can quote the higher price? Please clarify. So how much time line will investors have to get rid off their shares once delisting is confirmed. Trading will stop over exchange once delisting is approved by board?
Many questions but concerned as i am holding many shares of hexaware. Thanks,
Delisting is usually at a premium to the current market price, hence. Time usually depends on the company’s timeline provided, can extent upto a year. Yes, trading will stop once delisted.
Hi Kartik,
How likely is a company to declare dividends after a bonus issue and usual time gap between the two ?
No standard procedure for this. The company can choose to do this back to back.
Understood. Thanks.
Hello Sir,
I hope you are doing well.
Suppose that If I were to take some shares of a particular company, I would be eligible for the dividend?
Yes, you’d be eligible.
Sorry, I forgot to complete last the question.
If I were to take some shares of a particular company before one month, I would be eligible for the dividend?
Yes, you’d be 🙂
I have applied for some Rights shares of RIL through SBI account ASBA. For the new shares a new ID was created in CSDL while I have my shares in another ID of CSDL and that is with Zerodha. On 11/06/2020 I got a mail from CSDL that Rights shares are debited from CSDL. Kindly help how all my rights shares will be added to my client ID in Zerodha.
Temporary rights entitlement shares were added to the demat accounts of
1. eligible shareholders of Reliance
2. investors who purchased the REs from the secondary market
The RTA credited the Reliance partly paid shares to the applicants on June 11th (with a temporary ISIN) and removed the temporary rights entitlements from the account. On the next day (June 12th) the exchanges issued the listing circular for RIL PP with the permanent ISIN. (The depositories then modified the ISIN accordingly)
I belong to the first category i.e. Eligible shareholders of RIL.
I applied through SBI Internet banking from my SB A/C through ASBA on 23/05/2020 for my eligible shares.(A/C linked to Zerodha)
The required amount of application money was blocked in my Account marked as Lien.
A separate client ID was created in CSDL for this, I do not know why . In Zerodha my clinet ID(CSDL) for RIL is different.
On 11/06/2020 CSDL sent a mail for my RE partly paid shares as DEBITED from my DMAT A/C.
Application money is yet to be debited from my account.
Please tell me whether my application for partly paid shares of RIL stands valid or rejected, if rejected then the REASON THEREOF.
Regards.
Please check this, Anit – https://tradingqna.com/t/reliance-rights-issue-dematerialized-rights-entitlement-trading/76627 , request you to take up the discussion on this thread.
Hai sir how to capture dividend through option strategy sir
Right now hpcl paying 9 rs dividend sir
My opinion was
Buying hpcl stock 2700qty at 232 . In equity.
Sell call options 220 strike one lot at 15.60
Buying put options 220strike one lot at 12
Sir is there any risk in his strategy sir .
How will you make money here, Jaya? I see you losing money here rather than making unless I’m missing something here.
Trying to understand the concept of Ex Div date and record date in conjunction
Scenario 1: 11th I sell stock, 11th is Ex Div date and 12th is record date = Am I eligible for dividend
Scenario 2: 11th I sell stock, 11th is Ex Div date and 13th is record date = Am I eligible for dividend
can you tell me in both scenarios what happens
1) Yes, because the stock is flushed out on 12 so you are still a shareholder as on 12th. But I’d avoid doing this if I’m chasing dividends
2) No, you won’t be eligible.
Got it… just a logical query…. since the price of shares falls by the value of dividend received say 5 rupees, would this have an impact on the Option premium of that stock on ex dividend date ? reason i am asking this query is the price fall is more due to a reward to share holder and not a negative news per say but at same time the derivative parameters are purely number driven.. so other things being constant….
Usually, for low price dividends, it does not impact much, but for special dividends it does. The futures/options contract will adjust for this.
1)what is difference between face value and share price?
2)I think there is much difference between share price and value of investment.
1) FV is the nominal value of the share assigned at the time of creation. The share price is the market-driven price
2) Value of investment = the money you invest and the growth it experiences.
1)So, market value and share price have same meaning?
2)What is meaning of book value?
1) Depends on the context. But generally true
2) The book value is the networth of the company divided by the number of shares outstanding.
I have accidently buyed rights issue shares of AB Fashion but I don’t have any existing shares of AB Fashion. Will I get my shares or not and what will happen to that shares afet I sell it??
These were right entitlements. Do check this – https://tradingqna.com/t/aditya-birla-fashion-rights-issue/82619
Kindly advise the situation after a right issue, Stock price today ₹240, Right issue 1:1, Next day stock price opens at ₹135. Now I want to know what will happen to the put option writers position, Put buyers position, and Futures long and shot positions.
All short position makes money and long positions do not 🙂
Is it still possible to do bonus stripping still? I guess we cannot offset our short term loss with Short term gains right while paying taxes?
You can offset gains with losses, I need to check on bonus stripping.
Whenever dividend is paid off, the stock price goes down exactly the same as the dividend paid per share. So let say a XYZ company has share price of Rs.305 and decides to pay dividend of Rs.5. Now i do get the money but i also lost the same as the share price drops down. So what exactly happens here? Kindly elaborate!
Usually, for small dividends this does not happen, for example, 5 on 305 is considered small. However, if the dividend is more than 25% of the stock price, the adjustment in the price happens.
So if we consider the dividend to be greater than 25% than what all adjustments are taken? Are there dividends greater than 25%? Because that’s a huge drop on the share price!
Yes, that is a common practice. I think recently ITC gave out a large dividend. The stock price goes down to the extent of the dividend issued.
The stock split and the bonus issue, both reduce the price of the stock. For the same value of money, people get more stocks. Wont this reduce the face value of stock? Also, it reduces the EPS. Does it affect the company i terms of loss?
Thats right. Stock split reduced the FV, but not the bonus. Either way, it reduces the EPS.
Hi team.
I understood the concept of stock spilt and bonus.. you guys say the stock price reduces in the same ratio..
Say 100 is the old price.. after split it’s goes to 50 (current price).
I don’t own any shares untill split.
The next day of split.. if I need to buy 10 shares I should be paying only 500 right ? Even though the graph shows 100 per share ?
No, you will pay the split price, since this is the current market price.
Hello Karthik,
As usual the article is excellent, one question I have regarding dividend even after reading some comments related to it.
Let’s consider Britannia company, it has announced interim dividend of 83 per share , record date : 27 August 2020 and ex-date is 26 August 2020.
CMP is 3880. I have 2 cases, please clear my understanding.
1. If I bought 100 shares before ex-date then I’m eligible for dividend right and profit would be 8300 (assuming CMP has not fallen)? Then many can follow this strategy right? once dividend is received then sell the shares.
2. Since dividend amount is on higher side, chances are CMP would drop to the extent of dividend, right? Then buying the shares at this time would be a loss.
So buying the shares after announcing the dividend would be a risky factor since we cannot predict the market sentiment for Britannia unless it is bullish.
Hope I’m clear with the question.
1) Yes, as long as you have the shares before the record date, you will receive the dividends. Assuming the stock price stays at 3880, and you receive the dividends, then your profits will be 27 per share or 2700
2) Not always will it fall. It falls in case of the special dividend where the dividend is at least 25% of the CMP.
For point 1, profit should be 83 per share and total 8300 right? You mentioned 27 per share.
I thought 27 is the dividend you are to receive. How did you arrive at 83 per share?
hi!
if on 1st 0f any month dividend is declared and the ex-dividend date is 4th of that month, and I am an existing shareholder, then if I sell my shares on 3rd of that month (such that shares are still in my Demat account on ex-dividend date) Am I eligible to dividend and also did I manage to skip the drop in ex-dividend price?
Thank you,
Roopam Rana
The point is that you need to be a shareholder by the record date. As long as you are listed as a shareholdere, you’ll receive the dividend. By the way, the drop in ex dividend price is not much, unless it is a special dividend, i.e. the dividend itself is over and above 25% of the share price.
83 per share is announced by Company itself, so profit would be 8300. Did I miss anything here?
Ah, sorry, for some reason I thought you said the dividend was 27, so 27 times 100 = 2700. My bad.
How is the face value of the stock important for a trader or an investor?
All corporate actions are based with reference to the face value.
For having a quick glance over the daily stock price rise/fall ,year High/Low,Marketcap,div yield,beta,PE etc,I want to have these features in my portofolio list itself.Can I create .add/to my portfolio holding?
Please check the stock widget for this. Check this – https://zerodha.com/z-connect/tradezerodha/kite/kite-3-0-everything-just-got-better
So say suppose the company issues shares at an FV of Rs. 10, but over the years the company performs poorly and the market value of the share drops to around 3 Rs. and in that case, the company decides to buy back the shares, given the current market value of the shares it is quite safe to assume that the shares are illiquid and that most of the stakeholders would not mind selling the shares, the company would have just ended up shorting the shares over a period of few years, I am thinking about shell companies. Really new to this, please do let me know if this situation is not at all possible due to the SEBI guidelines, if there are any. Also, awesome series of articles!
Mihir, there is a legal way to do this. The company will have to announce a buy back. The buy back is usually at a premium to market price, which gives the existing shareholders and opportunity to exit at good prices.
I purchased M&M finance RE shares. Where did that go? Im not able to see them in my portfolio nor the price gas been balanced or averaged.
The REs lapse after the trading period is over. Its like holding on to the rights application form after the rights issue has ended.
Hey Karthik
I need detail information regarding buy back. like how it happens , the whole process and at whch proce they buy their share back? what if the shareholder is not ready to give it back?
Please do check this, Parth – https://support.zerodha.com/category/trading-and-markets/corporate-actions/articles/how-do-i-apply-for-buy-back
HI Karthik, What is the difference between interim dividend and final dividend? Also, I wanted to ask is there any other type of dividends that are paid by the company to shareholders?
Interim is issued during the year, final is issued at the financial year-end. Apart from these two, companies can issue special dividends as well.
Is record date and effective date both or same?
A very silly question – as the price of the share increases or decreases, does the balance of bank a/c of the company and/or demat a/c of shareholder increase/decrease?
Nope. The balance impacts only when you sell the share and decide to liquidate.
Hi Karthik sir,
Will you please explain in detail why the stock price reduces after stock dividend. I understood what is mentioned in this module but unable to understand exactly the Reason why there is reduction in the stock price. I learned a bit accounting of bonus issue,there I find that the proportional balance is transferred from reserves to the share capital and the balance of share capital increases,now here’s one question,why they price falls though the balance of share capital increased.
Sir I am extremely confused on such small topic please help me.
Also why company opt for bonus issue instead of stock split as both has same effect.
Your response will be extremely helpful.
The stock price does not really reduce for normal dividends. But it does when special dividends are issued. Special dividends are those which are more than 15% (or 25%??) of the current market price.
In bonus issue, the value has to remain the same right? Else, I can keep on issuing bonuses and increase the shareholder’s value. Remember, the marketcap is a function of sharecap * stock price. If just the share cap increases without the adjustment to CMP, then that will artificially increase the market cap of at the company.
For a stock, ex split date was on Tuesday, record date was on Wednesday.
So if I bought the stock on Monday, one day before ex split date.
Am I eligible to get the splits ?
Yes, you should be.
Great content! Thanks for it and the comment section as well.
I dont quite understand rights issue. If a company`s stock was trading at 100/-, at announcement date there is a rights issue of 1:2 => For every 2 stock the subscriber already held, he/she can but new 1 stock at discount price (till ex date, right?). After payout date, a non subscribed user will still be seeing the companies stock at 100/-. Is this right?
So my question(s) are-
1. Where are the stocks being generated? Are they fresh stocks or the company is offering their own portion at lower price.
2. By what all means can the company issue new stocks to already existing stocks? Eg- if there are 100 stocks and I as promoter want to issue 1000 more stocks, what should I be doing?
3. In Right`s issue, what happens after payout date; to the stock price, number of stocks in circulation?
That’s right.
1) These are usually new shares issued
2) Promoters can dilute or the company can issue new shares.
3) Stock price remains the same, but the number of stocks increases.
Hi Karthik, Bonus issue decreases the share price. But the face value remain constant. So if X company has 10000 shares and face value is 10, then they have 1lakh as Capital reserves (10000*10=1 Lakh) and premium over face values times number of shares as Securities premium reserve / account . So bonus share increases share capital right? and what happens to Securities premium reserve / account?
Thats right, the bonus increases the share capital. Security premium reserves will come down.
what I the use of rights issue? the management is creating/issuing new shares and we are paying for those shares right? instead of gaining anything we are losing since per share earnings will fall right? then what is the point of right issue? Can you please explain karthik and correct me if I’m wrong.
Management is raising funds by tapping into the existing shareholder’s base. Yes, you have to pay for this if you wish to subscribe. The funds will be used to improve the business prospects which will give better shareholder’s value in the future, or at least that is the expectation of the rights issue.
Sir what is the difference between sorting and buying ?
Shorting is selling first and then buying. The sequence of ‘buy-sell’ is reversed.
Karthik,
Thanks for the excellent write up and explanations. I have just started reading them and enjoying it.
Regards Bonus and Stock split, essentially in both cases the number of shares increases, share price goes down but the investment value remains same. In stock split i understand the face value reduces. My question is in what circumstances will a company choose stock split over bonus or vice-versa and why ?
I need to do a bit of reseach on this, Swati. I’ll get back on this 🙂
Exactly on the ex-dividend date, who is eligible for the entitlement of the dividend.????. Purchaser or seller of the share???… Please clarify
Seller.
Hello sir,
First of all thank you very much for providing so much information.
I have query about Reduction of Capital. Today Subex have announced reduction of capital 1:1. but i am not able to understand what exactly it is. please provide some information about the same.
Once again thanks a lot.
Regards,
Minal Parab.
The company would have stated the reason, I’d suggest you look at the reasons quoted by the company.
does the company pay dividends to company shareholders only or to outstanding shares that are held with the company too?
I mean to ask, total how many parties are eligible to get dividends?
Dividends are paid to all the shareholders of the company Anmol.
Thanks for the reply.
Company has not provided any reason for capital reduction.
I want to understand what is capital reduction and what exactly happens when any company announces capital reduction?
Thanks,
Minal.
They do this by cutting the face value, they do this is distribute reserves, return cash to shareholders, and some time to improve the financial metrics (ROA, ROE etc).
Hi Karthik,
I was curious to know what if someone is holding a future and then stock split or bonus share announced.
How would the price change happens and lot size. also explain for PE and CE. What is the rule for that and what really happens.
The futures contract will be adjusted accordingly, Sanjeev. The adjustment factor is released by the exchanges under such situation.
I understand for futures it is easier. But what about PE and CE as they have Strike prices in their name for example SBI Oct 200 PE and SBI Nov 205 CE. How can this be managed until it is banned for at least month.?
What could be the possible strike prices for this and what about Open Interest data? Please elaborate.
The adjustment ratio is applicable to all strikes. The exchange has a proper framework to ensure the adjustment happens smoothly.
Why Would The Share prices Of The Company Drop After Paying Out The Dividends ? How Does It Matter if The Company has Paid The Dividends and The Amount No Longer Belongs to The Company , I Mean , After all It Is The Shareholders Who Buy The Shares of The Company and The Supply and Demand of It Is What Determines The Prices of The Shares ; Not How Much Cash The Company Has Got.
No, not always do the share price drop upon the issuance of a dividend. It happens when only large/special dividends are paid out, which as you know is not a regular affair.
Is Face value of the stock and LTP is same or different?
what do you exactly meaning of face value?
No, face value is the nominal value of the share, set by the company at the time of creating the shares. LTP is the last traded price of the company driven by market’s demand and supply.
what happens on ex-record date and on record date of buyback offer ? I mean whether price go up or down ?could you please elaborate with reasons as well .
Thanks in advance
Prices are not affected by the buyback. Of course, if the buyback is backed by solid reasons, and if the buy back is at a much higher price compared to the market price, then the stock price may increase.
What if I sell the shares I hold after the record date or the ex date? Will I still get the dividend?
Yes, you will if you hold to record date.
Sir how Share price after Bonus issue is determined
It gets adjusted to by the factor to which the bonus is issued.
@ Mr kartik is there any other module for intraday strategies… I am tired of learning intraday trading style but there is not any clear module anywhere where one can learn intraday. As I am a beginner. Please recommend me something to read and learn and practice.
Regards
Most of the TA patterns can be applied to intrday as well.
Sir I thought of applying for majesco dividend of 974,where the stock price is 982 and I came to know that stock price might come down in the market after exdividend
Sir what really happens after exdividend
Thats right Chandu, the price will decrease to the extent of the dividend paid.
Hey Kartik, awesome writing here, it’s been easy to understand a lot of stuff. This was written in 2014, I hope you’re doing well. My question was regarding bonus issue. As far as I’ve been able to understand it, the company takes money out of it’s reserve, buys some of it’s own shares, and gives it to shareholders for free. The company hence can transfer the money in the reserves to the share capital and the shareholders can get extra shares. My question is are the shares that the company procures, are these from the unissued shares pile? If the number of issued shares are now increased, does the company have a smaller stake? If yes, then is this another point of difference b/w stock split and bonus issue? If anything I’ve said here is stupid, please spare me, I’m an engineering fresher with zero finance knowledge, trying to learn
Thanks, Aayush. I’m doing good!
Thats right, these are new shares and all shareholders (including the promoters) get diluted with bonus shares. Thats also correct about the difference between Bonus and split, and you are right about it 🙂
Hi,
1) buying a shares at record date will be risky? Right. For e.g. If anyone had bought majesco at 23 Dec, which was record date, around rs ~980 per share, and next day price was adjusted and dropped to 12. Huge loss correct? As not eligible for dividend.
And this will applies to bonus, stock split scenarios as well. ?
2) I can sell at record date and purchase next day, ATST. Think of majesco 23 & 24 dates. Huge profit. Is my assumption is correct?
1) It is not a loss, on the record date, the price would have been adjusted right?
2) There are no huge profits, its just that you are getting a dividend 🙂
Karthik i have two questions:-
1)Are dividends paid share ex. if Rs10 dividend is announced and i have 10 shares of that company do i get Rs100?
2)How can company generate bonus shares without changing the face value? in this way any company can generate any no. of shares they want?
1) Yes, that’s right. Its always on a per-share basis.
2) They can’t generate any amount of shares, essentially they will have to infuse more equity from reserves and create more equity.
Hi Karthik,
In the case of “Buyback”, at what price company buys the shares from you, and is it negotiable?
What if I don’t want to sell it?
Its a fixed price, it is it really up to you if you want to tender the shares or not.
If the company gives a bonus with 1:1 ratio then the participant’s share will be double but the share price will reduce to half then in this transaction, how it will be beneficial to the participant?
Share price reducing, qty increasing results in same value, right?
1. Is ex-date is same as effective date?
majesco ltd. only mention effective date on moneycontrol.
2 I bought only 1 share(for test purpose) of majesco on 21/12/2020 effective date is 23/12/2020, i didn’t get any dividend, any idea?
1) Not sure what éffective’ date is but it looks like it
2) Nope, you may want to call the support for this.
Dear sir,
Sorry if this Is a repetitive question.
When you say you need to buy a share before Ex Date, does it mean have it in my Demat account or buy it before Ex date?
Lets say Ex date for X company is 10/02/21.
Do I need to have shares of the company by 09/02/21 in my demat or can I purchase shares on 09/02/21 and take delivery in order to receive a dividend?
Trace, we have discussed this across the queries, request you to please check the same.
I sold IOC 105 feb CE yesterday as today is ex-date for rs.7.5 dividend payout. Today IOC feb 105 CE contract adjusted to dividend pay out amount and I see strike as IOC 97.5 ce in my positions. However IOC feb FUT didn’t seem to go through this change, so it appears we should sell FUT before ex-date if we expect correction in stock price due to significant dividend payout. Is that correct? Could you please help me understand?
Hmm not really, check this post – https://tradingqna.com/t/adjustment-of-f-o-contracts-in-rec-limited/94659
Thank you very much karthik. This explains.
Sure, good luck and happy reading, Venkatesh.
Hi, I sold put option of ITC FEB expiry of @220.
Will the strike price change post ITC Interim dividend which is on 22nd Feb.. Means it will become strike price @215 and I need to take physical delivery @215.
Depends on the dividend. Co incidentally, we are putting up a small post on the same topic on Instagram, do follow us there for info 🙂
What will be the impact on the share price after ex-split date, If the face value increased from previous value of 2 to 10, i think its no. of shares will drop & the value should increase…what if the share value does not increase after ex split date, should we buy or not, as generally the value of share post split should be 5 times in such case and if we are getting at the same rate, discounted rate i think we should buy that…
Across both splits and bonus, the number of shares will vary but the value remains the same.
Hey Karthik, I have a confusion regarding dividend payout. Ex dividend date is announced before the arrival of ex date. So, If anyone who buys the stock before ex dividend date and sell it on or after ex dividend date, then after 30-45 days, he will receive the dividend amount. If it is that simple that holding a company for 2-3 days make you eligible for dividend payout, anyone can receive dividend very easily without loosing anything. Please explain why does everyone not invest in stock for 2-3 days just to receive dividend payout if it’s that simple ?
Yes, but you are assuming that your buy and sell results in a profit. What if it does not?
In the table ,its showing that share price decrease after Bonus Issue. But at the end of that paragraph, you said Face Value remains unchanged, how is this possible since Face value is the value per share. Please clear my confusion.
Bonus shares, the face value remains the same (unlike stock splits), and the share price reduces.
Hi!!
Thanks for providing such an amazing course.
I had a query regarding the rights issue. If it’s something similar to second IPO, will there be any role assigned to the Merchant Bankers? If yes, can you please explain how will this scenario be different from that of the first IPO?
Rohan, a merchant banker will be appointed to manage the issue, find the right price for the rights and do the legal legwork with regulators. The price discovery steps of the merchant banker will be slightly different than in an IPO since shares of the company are already listed and there’s a ready reference point.
Buy back is not clear, what is open market buy back?
Advantage or disadvantage for investor to participate.
If you hold 21 shares & 5:1 bonus issue declared, you get 105 bonus shares and with your original shares your total shares will be 126.
SIR ,CAN YOU SHARE ANY TRADING TECHNIC IN WHICH LOSS IS NEGLIGIBLE, AND GET GOOD REWARD ON THAT BET
Wish I knew the same 🙂
SIR, AS P/B RATIO OF RELIANCE INFRA IS 0.08 ONLY AND ITS BOOK VALUE IS 400 .
ACCORDING TO RATIO ASSETS ARE MORE THAN ITS LIABILITY , SO SHOULD I BUY OR NOT?, WHERE COMPANIES ASSET IS MORE THAN ITS LIABILITY.
Ratios are ok, you need to look at the financial statements for a detailed perspective.
Understood
Hello Sir,
For Rights and bonuses, how is the company creating new shares?
Are they reducing the amount of shares from the promoter?
They can issue new shares by deducting cash from reserves.
During buy back corporate action, does the company reserves the right to take back the shares from a share holder against his wish? Or it has to buy back the shares with the consent of the share holder.
No, the company cant do that.
sir, Delisting k time pr Outstanding shares ki settlement Kaise Hoti…??
kya promotor sab k shares khreed leta
Buyback se Company k reserve pr kya fark pdta h..??
sir , If Companies share price follow its companies business performance is true ??
Then 2 day ago Reliance 2021 Q4 Result is almost double its Previous 2020 Q4 result.
I think Thats Huge Growth, But even after Good Result, Reliance Share price Goes Down around 2% In next 2 trading session.
The fact that the results will be good was perhaps already factored into the price 🙂
sir, Delisting k time pr Outstanding shares ki settlement Kaise Hoti…??
kya promotor sab k shares khreed let
Yes, sometimes the company buys them back.
sir last year reliance m Facebook ne invest kiya around 10,000cr… my question is this …toh unko 10,000 cr k huge share bechee kisne ???
retail investors ne , Institutions ne ya promotor ne…??
company m kis k share kam hue
hi karthik,
1.is there anything like I need to hold some minimum number of shares to be eligible for a dividend payout?
2. if I m eligible to get a dividend then how many days will it take for the amount to be transferred to my demaat account?
3. if I am a share holder of a particular company and the company announces dividend payouts then will the dividend amount automatically settle in my demaat account or will I have to apply for that or something like that?
thanks,
mukesh
1) Not really
2) Depends on the company
3) Yes, the funds will be settled directly to your bank account, not to your DEMAT account.
Hello Sir,
I thank you for replying to my question.
I still did not understand how companies create new shares for Bonus/split/rights issue.
Your answer was that they deduct cash from their reserves.
But how does that happen? If they deduct cash from their reserves that cash goes to their current account correct?
Please let me know?
Ah, reserves as in not the funds in the bank. You need to look at it from the Balance sheet perspective.
When there is Rights issue – do Mutual Funds/ Institutional investors also get an option to buy into the rights issue? Or are there special conditions for such investors?
Yes, all investors do.
Hi sir,
I have one doubt. If suppose I buy 100 shares of a company for 100Rs. The value invested is 10,000Rs. The company issues 1:1 bonus. So I will get 200 shares . After 3yrs the stock price rises to 200Rs, and if I sell those shares I will get 200*200 = 40,000Rs. Am I right sir?
Thanks in advance.
Thats right, the price you get at the time of selling = number of shares * price per share.
Sir,
If company is giving special dividend (i.e more than 5%) and if I want gein the dividend amount can I go long in cash equity and short in future of the same month. Will it help me to get the dividend amount as both future and cash will get adjusted on ex date.
Yes, you can do that.
Sir, Like BPCL has declared a dividend of 58 rs so I can buy 1 lot in cash segment and sell 1 lot in future of same month. With this the stock price will remain balanced as if stock moves High then cash segment will give profit and future lot sell will give loss while the opposite of same holds true if stocks moves on lower side and when ex date came that day we can get the dividend amount and close both the position. Does this type of strategy is successful in real market. On theory it looks gud.
Hmm, but with such dividends, the futures would have factored in the price. I haven’t checked, but did the futures trade at a discount to spot?
Hello Sir,
I hope you are doing well.
Can you update this section with the new rights issue mechanic since we can purchase rights issues like a share in the market now.
Rights are always listed at a discount, so the rights are over does the discounted price and the CMP converge?
For example sundaram financial holding has a rights issue at Rs. 50, the CMP is 75. What happens to the stock price after the shares are allotted?
Will try and do that, Harit. Check this meanwhile – https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/right-entitlement
Dear Karthik,
I did read that before asking a question.
A] My confusion is about what happens post rights allotment? I buy the rights at 50, the CMP is at 75. Do the prices converge or
basically I can sell the shares immediately once I got the shares allotted for Rs. 25 for a 50% gain. This doesn’t make sense to me.
B] Where are these new shares created?? Does the promoter have to decrease his holdings.
C] I don’t understand how new shares are given out for bonuses and esops etc. Where do they come from as 100% of the company’s
shares are owned by some entity correct? Like 60 % promoters, 30% Retail, 10 % DII/FII etc.
So how are new shares created and from where?
Thank you
The rights shares are new shares issued by the company against the discounted price you’re paying. The shares of a co. incorporate the effect of rights on the ex-date itself since everyone knows how many new shares will be issued and how much dilution of holdings is taking place. This also affects the balance sheet structure of the company. Assume you hold 1 share of a co., and it issues you one more rights share at the current market price of Rs. 100. Now, this Rs. 100 goes to the co. and it can use the money for business activities. Since the balance sheet structure of the co. has changed even though the price of the rights share was the same as other shares, the share price of the co. may change. Let’s take a look at your questions:
A. Since the price convergence takes place on the ex-date (much before the rights shares are issued), you should be able to sell the shares immediately for a gain if the rights are issued at a significant discount.
B. The company has issued new shares to its shareholders. The promoter holdings may change if they apply for more shares or less shares than they’re entitled to. Assume the co. has two shareholders, you & me. It issues rights in the ratio of 1:2. You hold 100 shares and can apply for 50 rights. I hold 200 shares and can apply for 100 rights. Original shareholding pattern: You – 33%, Me – 66%. I apply for 80 shares and you take up 70 rights shares. Now, the shareholding pattern becomes: You: 38% (170/450), Me: 62% (280/450)
C. The company creates new shares and issues them. New shares can be created just like you make them when a co. is formed or sometimes when it goes IPO.
Hi Karthik, Bonus issue and stock split looks quite similar. In the latter there is face value as a basis but what about Bonus issue ??
How ever they sound quite similar , at least from your explanation. Please clarify !!
Bonus is decided basis the number of shares you hold. For example, 2 bonus shares for every 3 held.
Hello Sir,
This is a follow to my previous question.
For example Sundaram Finance Holding has a rights issue at 50. The current price is 75.
Now that rights are traded, I can buy as much rights issue as I want and then sell it at cmp at 75.
Something seems off.
When a company issues new shares, do the existing shares getting diluted? Do they remove the money from their reserves?
My doubt is regarding the bonus.
Let us assume that the ratio is 1:3 and I have 5 shares of that company. Soo is it that I get just 1 bonus share for holding 3 and no bonus share for the remaining 2 shares held.?
That will be considered as fractional shares and will be settled in cash.
When the stock goes ex-dividend, usually the stock drops to the extent of dividends paid. For example, if ITC (trading at Rs. 335) has declared a dividend of Rs.5. On ex-date, the stock price will drop to the extent of dividend paid, and as in this case, the price of ITC will drop down to Rs.330. The reason for this price drop is because the amount paid out no longer belongs to the company.
May i know Who decides the new price?
The stock exchange (nse or bse) Or the market participants are so smart that they will bid for the price accordingly
There are standard ‘adjustment factors’ for such events, which the exchange will implement and normalize the price.
One thing confused me please clear it.
When a bonus is issued why reserve decreased? Price is decreasing because of bonus then why reserve also decrease? Then where this reserve money goes after bonus issue?
When the bonus is issued, cash from reserves is reduced, and share capital is increased and the balance sheet is balanced.
Vikas Ecotech right issue how to apply.
One of the best explanation in simple layman language .Must compliment the writer and editor
Many douts cleared in the first reading only
Happy reading, Atul!