When a company goes public, it has to make constant effort to keep its shareholders satisfied. Some companies show tremendous growth in EPS, many announce quarterly dividends, some issue bonus shares and a few declare stock split, etc.
Many investors do not have the acumen or experience to understand the rewards provided by companies. The most common confusion which investors go through is between Bonus share and Stock split.
When a company wants to retain, strengthen and distribute its accumulated earnings to its existing shareholders they announce bonus issue. Bonus issue, as the name suggests, is the bonus share issued to shareholders in proportion to their existing shareholding pattern.
These shares are tax free to shareholders and are equally beneficial to a company, helping to increase its creditworthiness in the market.
For example : The bonus issue declared by ABC Ltd. is 2:1. This means, for every 1 share held by an investor X , he is entitled to 2 more shares in his demat account.
On the other hand, Stock split refers to dividing one stock in the ratio declared. In this the face value of share gets reduced but the total holding in terms of value remains same for that security.
For example : ABC Ltd. declared a stock split of 1:2. This means for every 1 share investor X holds worth Rs 100, the share count will become 2 worth Rs 50 each.
Stock split is usually done by companies to enhance retail participation by curtailing its steep price and to increase liquidity in the market.
Now that investors own a hefty amount of shares in the demat account, it becomes challenging to effectively maintain the portfolio and reap regular profits from manual trading.
Traders, commonly, override their funds with the wrong strategy.
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