Upcoming Bonus Issue
About Upcoming Bonus Issues
What is an Upcoming Bonus Issue?
Why Upcoming Bonus Issues Matter to Investors?
Bonus issues are commonly perceived as a positive indication by the management of a company that it is in good financial health and has the potential to expand in the future. Here is why investors should keep track of bonus issues:
1. Sign of Financial Strength
Usually, bonus issues are indicators of a company's strong financial stability, stable earnings, and a strong balance sheet, where a company can issue bonus shares from its reserves.
2. Capital Preservation
A bonus issue allows a company to reward shareholders while retaining its cash for business expansion, capital expenditure, or debt reduction.
3. Shareholding Increase
Bonus shares directly increase the number of shares an investor owns, boosting their ownership at no extra cost.
4. Improved Liquidity
By issuing additional shares, the free float of the stock rises, the trading volumes improve, and entry/exit in the share becomes easy.
5. Psychological Impact
A lower share price (after adjustments because of the bonus) encourages new purchases and increases retail involvement as the investors think that now shares are available at a lower price.
Key Dates to Track for Upcoming Bonus Issues
In order to receive a bonus issue, it is important to understand a few dates. Some of them are listed below:
1. Declaration Date
This is the date on which the company issues a formal declaration of the bonus issues, including details of the bonus ratio and timeline.
2. Ex-Bonus Date
The first day, the stock trades without the bonus entitlement. To receive upcoming bonus shares, investors must purchase the stock before this date.
3. Record Date
On this date, the company's official records are checked to identify the shareholders who are eligible to receive the bonus shares. Due to the T+1 settlement system for Indian stocks, investors must have the shares credited to their Demat account on or before the record date, which necessitates buying them before the ex-bonus date.
4. Credit/Allotment Date
This is the date on which the bonus issues are credited to the demat account of eligible shareholders.
How Upcoming Bonus Issues Impact Stock Prices
Announcements of Bonus issues can generate instant excitement and affect the share price. Some examples of how bonus issues impact stock prices are mentioned below:
1. Pre-Ex-Bonus Buying
To avail the advantage of bonus issues, investors often try to buy the shares before the ex-bonus, which can cause a rally in the stock prices.
2. Ex-Bonus Price Adjustment
After the bonus issues, the stock prices of a particular stock are adjusted down due to the issuing of the bonus shares. The adjustment is proportional to the bonus ratio, ensuring the company's overall market capitalization remains the same.
3. Post-Bonus Issue
During the post-bonus-share-crediting phase, the stock prices of particular stocks reduced, resulting in increased liquidity of the stock. This could bring new investors to the stock and potentially result in heightened trading volume.
How Traders & Investors Use Upcoming Bonus Issues
If you're a trader or an investor, you can use upcoming bonus issues in various strategies.
1. For Long-Term Investors
- Wealth Accumulation: An investor who holds the stocks for the long-term benefits from the bonus issues as their number of shares increases at no extra cost. As time goes by, the company's valuation increases, and hence the value of their shares also increases due to compounding of their initial investment.
- Confidence Indicator: A bonus issue signals management optimism about the future of the company, and encourages long-term investors to hold their investments in the particular stock.
2. For Traders
- Event-Driven Strategies: Bonus issues create an opportunity for traders to make quick returns by keeping a close watch on all aspects of the bonus issue to buy the shares at low prices and sell them when stock prices increase.
- Liquidity Improvement: The bonus issue increases the stock's liquidity in the stock market, making the stock more attractive for active trading, as stocks become affordable and easy to buy and sell.
