Notes : Investment Planning

HOW DOES BONUS SHARE AFFECT INVESTORS?

Immediately, It doesnt affect your investments anyway. Post the bonus, the share price should fall in proportion to the bonus issue, thereby
making no difference to the personal wealth of the share holder. However, more often than not, a bonus is perceived to be a strong signal
given out by the company and the consequent demand push for the shares causes the price to move up.So, when stock prices move up in the
long run, there will be dramatic increase in the wealth youre holding.
WHY DOES A COMPANY SPLIT ITS STOCK?
The primary reason is to infuse additional liquidity into the shares by making them more affordable. It needs to be reiterated here that the
shares only appear to be cheaper, though it makes no difference whether you buy one share for Rs 3,000 or two for Rs1,500 each.
HOW DOES IT AFFECT YOU?
It is like cutting an eight-inch pizza into 12 slices from four slices before. But if you want to buy the shares of a company which are frightfully
expensive, you can now buy them for less. Except for that , in a stock split, fundamentals about the company does not change, the issued share
capital remains the same, the revenue remains the same, and the profit remain the same too! But, since the number of shares issued increases,
the profit per share (or the Earnings Per Share EPS) decreases by the same factor.
So, if EPS is Rs. 15 per share for a share having a face value of Rs. 10, after a 10:1 stock split, the EPS would come down to Rs. 1.5. But since you
would be holding 10 shares now, your share of EPS remains the same: Rs. 1.5 * 10 shares = Rs. 15, which is as before!
So, if the PE of the stock is 20 in our example, the price would go down from Rs. 300 (EPS of Rs. 15 * PE 20 = Rs. 300 per share) to Rs. 30 (EPS of
Rs. 1.5 * PE 20 = Rs. 30 per share). But again, since you would be holding 10 shares now, your actual holding remains the same: Rs. 30 * 10
shares = Rs. 300, which is as before!
So, there is absolutely no change anywhere, except for the number of shares traded!
WHY DOES MARKET CHEER STOCK SPLITS?
Stock market interprets a stock split as a statement of confidence by the company it interprets a split as a signal from the company that it is
confident about its future growth. Also, a stock split increases the number of shares traded in the market, which increases liquidity.These
factors are considered positive, and therefore the market reacts positively!
TAX IMPLICATIONS
Bonus shares- As far as tax is concerned, since no money is paid to acquire bonus shares, these have to be valued at nil cost while calculating
capital gains. The originally acquired shares will continue to be valued at the price paid at the time of acquisition. An incidental tax planning
benefit is that since the market price of the original shares falls on account of the bonus, there may arise an opportunity to book a notional loss
on the original shares. This is known as bonus stripping. The Indian Income-Tax Act has introduced measures to curb bonus stripping.
Stock splits As far as the tax implications for stock splits are concerned, well, there arent any. A stock split, like a bonus issue, is tax neutral.
However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original
cost of the shares also has to be reduced. For instance, if the cost of the 100 shares at Rs 1,500 per share was Rs 1, 50,000, after the split the
cost of 500 shares would be reduced to Rs 300 per share, thereby keeping the total cost constant at Rs 1, 50,000.
CONCLUSION
So, if you are an investor in the company, you have reason to celebrate when you get a bonus. But dont celebrate when your company splits
stock. Its is just a technical change in the face value of the stock. But if you want to buy more shares, it is good news because now, you will be
able to afford them or at least get them cheaper!