Impact of Share Split and Bonus Distribution on Share Prices
Investors often confuse the effects of share split and bonus distribution on the actual share price. While both actions do initially cause a change in the price of a single share, the mechanics and long-term effects of each differ significantly.
Effect of Share Split
A share split is the process of dividing existing shares into smaller units. For instance, a 2-for-1 share split means that each existing share will become two. This action doubles the number of shares in circulation, but it does not alter the net worth of the company. Consequently, the share price is halved to reflect the new larger number of shares. The primary effect of a share split is to make the stock more accessible to a wider range of investors, as the price per share becomes more affordable. This increased accessibility can lead to more trading activity within a shorter period, potentially driving the average share price down as more shares are bought and sold.
Effect of Bonus Distribution
Bonus distribution, often referred to as a scrip dividend, involves issuing additional shares for free. This increases the number of shares in circulation, just like a share split, without changing the company's net worth. However, with a bonus distribution, the number of shares increases to twice the original number if a 100% issue is made. This practice, though akin to a share split, can sometimes be difficult to maintain consistently. Bonus distributions are often restricted by the company's revenue reserves, as issuing more shares erodes these reserves.
In the immediate aftermath of issuing bonus shares, the effect on share prices can lead to a significant drop. This is because the increased supply of shares can flood the market, prompting a decrease in share price. The reduced reserves also signal to shareholders that the company may face challenges in future dividends, potentially making the investment less secure.
Comparison and Further Analysis
Share split and bonus distribution both result in an increased number of shares in circulation, but the manner in which these shares are distributed and the subsequent impact on share prices differ.
A share split is a straightforward process that often leads to immediate price adjustments. The pricing mechanism is almost proportional, as each existing share is divided, and the number of shares is doubled. This process can make the stock more attractive to investors and potentially boost trading volumes and the overall market interest, leading to more fluid share price movements.
In contrast, bonus distribution can be more complex. While it increases the number of shares, the bonus shares can be seen as a sign of good business performance. After the declaration of bonus shares, the share price may initially rise due to positive market sentiment, but it can drop afterward due to the dilution effect. However, if the company is performing well, the positive sentiment can help the share price regain its pre-dilution levels.
Conclusion
Both share splits and bonus distributions have distinct impacts on the share price. While a share split makes the stock more accessible, a bonus distribution can dilute shareholder value and reserves. Understanding these dynamics is crucial for investors making informed decisions about companies they are considering or are already holding shares in. By carefully analyzing these impacts, investors can make more strategic and effective choices.