Pre-Bonus: Let’s assume you are eligible to have 2 slices of pizza from a 8-slice pizza. In terms of investing, you own 25% of the company.
Post-Bonus: If however,1 more pizza gets ordered, would you feel happier, considering that you don’t have to pay for that extra pizza? That’s what happens when a company announces bonus. While number of shares increase, however, your share in the total consumption remains the same. 4 slices out of 16 is the same as 2 out of 8, i.e. your share of ownership does not change. It continues to remain at 25% ! !
Bonus does not create any wealth for the shareholder. His relative share in the company continues to remain the same.
Pre-Split: Let’s assume you are eligible to have 2 slices of pizza from a 8-slice pizza. In terms of investing, you own 25% of the company.
Post-Split: Let’s assume the pizza slice is cut into 16 slices. Now, your earlier 2 slices of pizza have become 4. Does it feel better? May be, but in reality, it doesn’t change anything!! That is what exactly happens to an investor post the company announces a stock-split.
Stock-Split does not create any wealth for the shareholder either. His relative share in the company continues to remain the same. Instead of 1 share, he may end up having 2 shares, but that does not translate in greater ownership in the business.
Why so-much noise when a company announces a bonus or a stock-split has been beyond my comprehension. At times, unnecessary action by the management in terms of announcing bonus or stock-split gives the impression of creating wealth for its shareholders !! After all, people love to associate themselves with management who is action-oriented, even when it leads to counterproductive results.
Disclaimer: Please note that these are my personal views. While I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.
Such a simple way of explaining something that could be so difficult for a layman to get through. Splendid!
thank you for your feedback and comments!!!
Simple analysis but most of times not properly understood. Thanks Vikas for explaining it so brilliantly in a simple way.
Thank you for your comments!!!