Learning about important factors such as dividends, bonus shares, and stock splits, can help investors make the right investment decisions and maximize their returns. Let’s look further into these concepts and find out what impacts them and their investments the most.
What Is a Dividend?
A dividend is a part of the profits generated by a firm, which is in turn paid out to its shareholders, as a return on their investment. The amount of the dividend is decided by the company’s board based on its financial performance and needs.
For example, assuming the EPS (earnings per share) of a certain firms is Rs. 10 and a dividend if Rs. 2 is declared. Those who own 1,000 shares will get Rs. 2,000. Dividends represent one way in which investors can earn passive income.
Factors Affecting Dividend Decisions:
Most businesses decide the attributable dividend shares based on their existing cash flow. Some of them would rather reinvest these profits towards expansion, while others prefer paying out loyal shareholders.
These dividends are usually decided by the shareholders on an annual meeting.
Understanding Stock Split
Companies divide their existing shares into more shares in order to reduce the share price without affecting the total value of investment. Their aim is to make the stock accessible to smaller investors. The overall value of a company is maintained.
Example: If the face value of a company’s share is reduced from Rs. 10 to Rs. 5 due to a significant increase in share price, then this would result in double the number of shares held by each shareholder, but the value of the investment does not change.
Why Do Companies Perform Stock Splitting:
A stock split is necessary in case the price of the share exceeds substantially and becomes expensive for smaller investors. The company then has a responsibility to defend its stock price and make it more appealing and affordable to a larger pool of investors.
Examples Of Stock Split In Certain Companies:
Morganite Crucible (India) Ltd., Eicher Motors and Laurus Labs have performed stock splits in order to boost their shares with retail investors.
What are Bonus Shares?
Bonus shares are newly allocated stocks given to shareholders at no extra cost. Such shares are usually paid out from the company’s profits and surplus funds. The intended purpose is to bolster the shareholder base which in turn decreases the price per share thereby making it more viable for other investors.
Example: When a business offers bonus shares at a 1:1 ratio, it implies that the existing shareholders will receive one additional share free of cost for every share already owned. This increases the shareholders’ stakes in the business while costing them nothing.
Why Do Companies Issue Bonus Shares?
In most cases, bonus shares are issued to dilute the price per share and encourage support from investors while it maintains the company’s valuation.
Bonus shares are beneficial for the investors seeking to profit from the rising value of the business as there isn’t any cash spent on acquiring extra shares for personal investments.
This does not compose of any monetary activities as it is what is referred to as a “paper-only” activity.
Such shares have been recently offered by Anuh Pharma Ltd. (1:1), Rajnandini Metal (1:1), Mangalam Global Enterprise Ltd. (1:2), Bombay Super Hybrid Seeds Ltd. (1:3), and Madhav Infra Projects Ltd. (3:1).
Important Elements for Investors to Consider
Dividend:
For investors, receiving a dividend is a form of passive income, however, companies pay dividends based on their profits and dividend policies.
Stock Split:
Done usually when the company’s stock prices appreciate significantly, a stock split increases the number of outstanding shares. This allows for greater access to shares without depreciating the value of the investment.
Bonus Shares:
These are issued at no consideration to existing shareholders out of the revenue reserves. Bonus shares lower the price of a share and increases the overall circulation of shares in the market, without any actual payment.
Final Thoughts
Perhaps the most essential factor is understanding dividends, stock splits, and bonus shares. An investor who follows these changes regularly is better positioned and armed to adjust his portfolio optimally and manage his assets more effectively. Bonus shares, regular dividends, and stock splits all serve distinct purposes and represent unique opportunities in stock market investing and expansion.
