Know the Stock market related terms Corporate actions, rights issue, dividends, bonus issue and much more
Dividends. You must have heard of it. Just like dividends… you may have also heard about bonus issue, stock split, rights issue etc. All these are corporate actions. In this post , we’ll cover all the topics under corporate actions , their types, and how they impact the shares investment.
A Corporate action is an event initiated by a company that brings a significant change to their securities — equity or debt. Corporate actions require approval by passing a resolution by the company’s board of directors. So, corporate actions include actions like dividend, bonus issue, share split, buy back, and more.
These actions impact your shares in different ways. Like, there can be a direct impact. Dividends have a direct impaction your shares.
Share split doesn’t have a direct impact. Your investment amount remains the same, but it brings some changes to the company’s structure.
Sometimes, the company changes its name. That doesn’t impact your investment, but it is also a corporate action.
So, in this post, we’ll talk about some major and significant corporate actions.
Dividends are rewards a company gives to its shareholders from its profits. And paying dividends is a mandatory corporate actions. When the company announces it, you receive it in your bank account.
There is a date called the dividend declaration date. It’s the date the company announces the dividends.
Then there is an Ex-date. It means if you’re the shareholder of the company on that date, only then you’re entitled to the dividend.
Then there is the record date. On that date, the company review its register and list down all the shareholders eligible for the dividend.
Then there is the dividend payout date. On the dividend payout date, you receive the dividend announced by the company.
So, whenever a company announces the dividends, the market takes it as a positive signal. Because it signals its existing shareholders that the company is profitable and can do well in the future. And the new investors in the market also take it as a signal of the company’s profitability and high potential growth in the future.
Generally, companies announce dividends once a year called the final dividend. But it doesn’t mean that the company will announce dividends only once a year. It can do so at any time. If a company announces dividends in the middle of a year, they are called the interim dividends. But mostly companies announces dividends once a year.
Understand the term Dividends with and example:
Now let’s take an example to understand it. Let’s say you have100 shares of a company, and the face value of the shares is 10 rupees. Now, the company announced a dividend of 5 rupees per share.
So you’ll get a dividend of 5 rupees for every share you own. As you’re holding 100 shares in this case, you’ll receive an amount of 500 rupees. And it is credited directly to your bank account.
You don’t need to do anything for that. There is only one condition. You must be the shareholder of the company as on the Ex-date.
Now we’ll talk about the second corporate action – bonus issue. It is also known as the stock dividend. These are the free additional shares that the company issues to its shareholders.
If a company has no or less cash reserves, it issues the bonus shares to boost the morale of its shareholders. Now let’s take an example to understand it.
Let’s say you have 10 shares of a company, pricing 100 rupees each. It means you have an investment value of 1,000 rupees. If the company announces a 1:1 bonus issue, it means that the company will issue one new share for free for each share of the company you hold.
In this case, you had 10 shares. After the bonus issue, you now have20 shares of the company. But your investment value of 1,000 rupees will remain unchanged.
And the price of your share, the 100 rupees, will drop to half because it was a 1:1 bonus issue. So, 20 shares * 50 rupees per share= 1,000 rupees, which is same as before.
The company does that because it boosts the retail participation in the market.
Let’s say the price of a share is 100 rupees and people can’t afford it. But if its price drops to half, the chances of retail participation in that share will be higher.
Now let’s talk about stock split. Stock split means when a company divides its existing shares into multiple shares to boost the liquidity in the shares. Let’s say the price of a share of a company is 5,000 rupees, and the company goes for a 1:2 stock split. Then, it’s value will drop from 5,000 to 2,500 rupees.
It leads to higher chances of retail participation in that share. So that was forward split. But sometimes, a company goes for reverse split. When the share price of a company reaches a low level, it can be a bad sign for the company. To change that, the company opts for reverse split.
As I told you in the previous case, the face value of… the shares drops to half. But in this case, the face value increases. So, if the price of the share is 10 rupees, and reverse split is opted, then the price rises to 20 rupees in the case of a 2:1 split.
Similarity and differences in Stock split and Bonus issue
The stock split and bonus issue are kind of similar. But there are some differences. Like, a stock split changes the face value of the company’s shares. But, a bonus issue doesn’t change the face value of the company’s shares.
A stock split doesn’t involve issuing new shares, but the division of the existing shares. Whereas in the bonus issue, the company issues new shares from reserves.
Now let’s move on to the next corporate action – rights issue. Whenever a company wants to raise new capital, it gives its existing shareholders an option to buy more shares of the company, instead of issuing a public offer.
In this issue, if the share price of the company is 100 rupees, the company offer shares for a lesser price like, for 80 or 85 or 90 rupees. It may vary from case to case. You can think of it as a second IPO for the existing shareholders.
If a company announces a 1:4 rights issue, it means that if you hold 4 shares of the company, the company is offering you right to buy one new share of the company. But it is up to the shareholder whether to buy it or not. It is not obligatory for you to buy that right issue.
Buyback of Shares
The next corporate action is the buyback of shares. The buyback of shares means that the company is buying its shares back from its existing shareholders. Why does a company does that? The company does that to restructure its capital structure. Or to reduce the number of shares if there is a large number of shares outstanding in the market. Or to increase its holdings as a safeguard against hostile take-over by another company. So, that’s why a company buyback its shares.
When a company announces a buyback, it signals the company’s confidence. Hence, it usually has positive impaction the share prices. Also, when a company announces a buyback, the market takes it as a positive signal of corporate restructuring of the company.
Mergers and Acquisitions
Now let’s talk about the mergers and acquisitions. First, let’s look at the differences between mergers and acquisitions. A merger is the combination of two companies to form one. Like, company A and company B combine to form a company AB.
And an acquisition means that company A is acquiring company B. So, if A is buying more than 50% of holdings in B, it is called an acquisition. You must already know that Vodafone and Idea used to be two different companies. But after the launch of Jio, these two companies merged to form Vodafone Idea. Because after the launch of Jio, Vodafone and Idea were seeking to reduce the competition. Hence, they merged their companies. So now they are called Vodafone Idea. That was an example of a merger.
And a while back when Flipkart bought Myntra, they did it because Myntra was giving them stiff competition in the apparel market. Hence, they bought more than 50% of Myntra’s holdings. This is called acquisitions.
So these were the major corporate actions. And these corporate actions impact the prices of your shares. It may be a positive impact or a negative impact. But if you’re investing in a company, you should know what corporate actions the company is taking currently. If you want to know more about the stock investing ecosystem, read out our other articles. If you found this article informative and helpful then don’t forget to share it with your friends and on your social media accounts.