{"id":297,"date":"2021-05-24T13:25:00","date_gmt":"2021-05-24T07:55:00","guid":{"rendered":"https:\/\/www.smevalueadvisors.com\/blog\/?p=297"},"modified":"2021-05-24T13:31:53","modified_gmt":"2021-05-24T08:01:53","slug":"investing-psychology-do-bonus-and-stock-split-create-any-real-value","status":"publish","type":"post","link":"https:\/\/www.smevalueadvisors.com\/blog\/index.php\/investing-psychology-do-bonus-and-stock-split-create-any-real-value\/","title":{"rendered":"Investing Psychology: Do Bonus and Stock Split create any real value?"},"content":{"rendered":"\n
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A common question among customers and investors<\/a> alike is \u2018How is the company\u2019?<\/a> A customer would answer the question based on the quality of its products, services and post-sales experience. However, investors dive into complex internal or market-linked parameters to analyse a company\u2019s worth. Based on the parameters used to analyse a company\u2019s profitability and growth potential, the answer could vary from person to person.<\/p>\n\n\n\n

Although analytical parameters are fundamental for examining a company\u2019s quality, some parameters prove redundant in creating any real value but are still widely used by companies and investors<\/a> to understand its worth.

Two such widely used parameters that appear redundant in creating any value<\/a> for the company are Bonus Issue and Stock Split.<\/p>\n\n\n\n


What is a Bonus Issue and Stock Split? <\/strong><\/h4>\n\n\n\n

A Bonus Issue<\/strong> is when the company\u2019s existing shareholders get extra shares for free in a particular proportion. For example, if a company issues 2:1 bonus shares, the shareholders will receive two shares for every share they hold. Furthermore, when the company announces a Stock Split<\/strong>, the existing shares are divided within themselves. Therefore, if the stock split is a 2:1 ratio, the number of shares doubles up.

Though the thought of having more shares for free sounds intriguing, in reality, the process of Bonus Issue and Stock Split do not create any real value for the company and the investors.<\/p>\n\n\n\n

Why are Bonus Issues and Stock Split redundant?<\/strong><\/h4>\n\n\n\n

Bonus Issue:<\/strong>
Suppose you have a Rs. 500 note in your left pocket and another Rs. 500 note in your right pocket, and you decide to move both the notes to the right pocket. Now, in your right pocket, you have Rs. 1000, and in your left pocket, you have Rs 0. At this point, your overall value remains the same. The same is the case with bonus shares.

There are two types of capital:<\/p>\n\n\n\n