When is a good time to buy, before split bonus or post-split bonus?
One of the most common questions in the minds of almost every investor alike is what the most appropriate time would be to buy a particular stock. Usually, the reason behind this question around timing one’s investments is to generate as much profit as possible and there exists a multitude of theories around it. In this article, we will understand when is it a good time to buy a stock, after a stock-split or bonus or before a split or bonus issue?
Before we get into the details, let’s briefly go through the meanings of both, a stock-split, and a bonus issue.
A stock split is a corporate action using which a company divides its existing shares into multiple shares, which means that the stock one presently holds splits and multiplies in number. Stock splits are done according to some ratio, if a ratio of 10:1 is announced, it would result in every 1 share being held becoming 10 shares. So, if one had 100 shares, then due to the split, these shares would become 1000 shares. As a result of the increase in the number of shares outstanding, the share price and face value will also reduce in the same proportion. If the share price was Rs.6000 before the 10:1 split is announced, the stock will start trading at Rs. 600 after the split is done. However, there is no impact on the investors net worth and market capitalization of the company.
Also Read: Stock split: Is it good for me?
Let’s now talk about the bonus issue, that is also a corporate action, done with the objective of rewarding the existing shareholders for showing faith in the company’s values, by offering them additional shares free of cost. Similar to a stock split, a bonus issue is also given out in some ratio. If the ratio is 2:1 then the shareholders get 2 additional shares for every single share they hold, so if one holds 100 shares, they will get 200 more shares free of cost as a result of the 2:1 bonus issue. Since the number of shares increase, there is an equivalent reduction in the share price, thereby not impacting the net worth of the investor and market capitalization of the company issuing the bonus shares.
Stock splits are done with the motive of increasing the liquidity of the stock as a reduced share price provides a lower entry point for investors to buy in. The objective of a bonus issue is to reward the shareholders while also letting the issuing company increase their equity capital base.
Key points to be considered before when one decides to buy stocks after a split or bonus issue or before that
One aspect which should be considered is that a stock-split is intended to be beneficial for both the existing shareholders and those potential shareholders who will buy the stock due to the increase in liquidity post-split. When it comes to a bonus issue, the intention behind it is to reward the existing shareholders for staying invested in the company. Due to the mechanics of the bonus issue, the stock price reduces which also creates a good avenue for potential investors to enter due to the reduced stock price. In other words, a bonus issue has an indirect effect of increasing the liquidity of the stock, even if that wasn’t the primary motive behind issuing bonus shares.
As we discussed before, both these corporate actions lead to an increase in the liquidity of the company’s stocks, due to the subsequent reduction in the price which makes it more favourable for investors to buy in at this reduced price. If one has done their research and is confident that the company will generate wealth for their shareholders in the long run, then buying in after or before a split or bonus does not matter.
On top of this, if the company stays well on track of its growth trajectory, then it is likely that the company may announce multiple bonus issues, stock splits or even give out dividends as a result of a successful business trying to generate shareholder wealth.
The bottom-line is that it is likely that both these corporate actions won’t negatively impact the future price trajectory of a stock. If it has intrinsic value, or in other words, is fundamentally strong, given that any external factors like economic cycles or internal mismanagement don’t impact the company’s value-addition activities, it may be a good stock to buy. If it was a good stock before the corporate action, then it is likely that it will still be a good stock after the corporate action.
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