A Beginner’s Educative Guide on Corporate Action : Learn with Case Studies
What are Stocks – Let us simplify
Stocks are a type of security that gives stockholders a “share of ownership” in any company. Stocks are also called as “equities.”
Let us begin by learning what are corporate actions.
Any company that has its share available for the public generates its capital because of its Shareholders which makes shareholders crucial for them. A corporate action is any action which is taken by a company that has a significant impact on the company and its stakeholders; which includes shareholders.
Stakeholder is any individual that has an interest in the business, such as employees, clients, customers, Investors, etc and stakeholder can affect the business or can get affected by business. When a publicly-traded company issues a corporate action, it usually has an impact on the stock price. Thus, if you are a shareholder of a company or looking to buy the company’s shares then you need to analyse them.
Let us have a deeper look into what are the types of Corporate Actions:
- Stock Splits
- Bonus Share
1. Stock Splits
In a stock split the shares of a company are broken down into multiple parts so that the number of shares of the company increases. This makes the stock more affordable with the reduced price.
For instance, Alps motor(source- BSE, India) had last split the face value of its shares from Rs 10 to Rs 1 in 2014. The share has been quoting on an ex-split basis from August 04, 2014.
To sum it up, stock split is a corporate action where the face value of a share is further divided while the number of shares gets multiplied by the same factor. Simply it means, the original share is split to make new shares with a reduced face value.
What is a Face value in Share market : Face value is a financial term referred to describe the nominal value of the shares as stated by the issuer party or the company. It is also called the ‘Par value’ of shares. In layman terms, face value is the original cost of the shares which is listed on the certificates. Face value of the shares are gullible to the price fluctuations by the market conditions.
There are reasons why companies go for a stock split such as to reduce the share price to make it more affordable for retail investors, being more affordable means the demand for the stock would increase in manifolds. As a result, the stock price will rise substantially. It is to be noted however that the total market cap of the company does not alter even after a Stock split.
To summarise, Stock split is performed to make the stocks of a company more affordable so more people could afford to buy the shares.
2. Bonus Shares
In a Bonus Share, a company offers free additional shares to its existing shareholders. These additional shares are allotted based on the number of the shares held by the investor.
For instance, in a 2:1 bonus issue, shareholders receive two additional shares for each share they own. The primary reason for issuing bonuses is to reward the shareholders and encourage retail participation.
The table below denotes the difference between Bonus Share and Stock Splits;
A dividend is a share of profits that a company pays out to its shareholders. When a company generates a profit and accumulates profit over a period of time, it can either be reinvested in the business or be paid out to shareholders as a dividend.
A dividend’s value is determined as per-share basis and is to be paid equally to all shareholders. It is to be noted that dividends are not mandatory, dividend yields are an effective metric to value dividends. The reason why companies pay dividends is that investors find these companies more profitable than those who do not pay dividends. Investors may see dividend payments as a sign of a company’s strength and stability.
To summarise, we learned about:
- Stock split is performed to make the stocks of a company more affordable so more people could afford to buy the shares.
- Bonus issues and stock splits are corporate actions undertaken to prevent share prices from rising high.
- Though the number of outstanding shares increases and the price per share falls, the market caps do not alter.
- Reverse Stock splits are performed to prevent the share price of a company from falling to its lowest.
- In a stock split, the shares of a company are broken down into multiple parts so that the number of shares of the company increases.
- Bonus issues and stock splits help make shares more affordable to the investors and provide greater marketability and liquidity.
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