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Chapter 6 Corporate Actions in the Stock Market

Dividend

Cash rich companies which do not have adequate opportunity to deploy cash in lucrative business opportunities return a portion of cash to its stockholders. Most often, dividends are paid out of profits though it is not strictly necessary. Dividends are announced periodically (semi-annually, annually etc). Generally, high growth companies do not pay much dividend, while stable cash generating businesses do. To be eligible to receive dividend, one should own the stock on the record date.

Stock Split

It is a scenario when a company announces that it is splitting the face value of its shares. Thus, if the face value is Rs 10 and the company announces 1:5 stock split, the new shares will have face value of Rs 2. The stock holder receives 5 stocks for each stock that he owned. The market price of the stock falls but the market capitalization of the company does not change meaningfully.

Bonus Issue

These are free shares that the stockholders of the company receive against the shares that they already own. Bonus shares are issued out of the reserves in shareholder funds. Companies announce a ratio by which new shares are allotted to existing stockholders. If the ratio is 3:1, the stockholder receives 3 shares for each share held.

Buyback

A company can offer to buy back its shares from the existing stockholders either because it thinks the share price is too low or because it has surplus capital that it cannot put to good use that it plans to return to the shareholders. Buybacks reduce the number of shares in issue and lead to increase in EPS.

Rights issue

In this a company offers new shares to all the existing stockholders in the ratio of their holding in the company. Shareholders are offered new shares at a discount to encourage them to apply in the issue. This is a primary issue in which the money paid by the shareholder accrues to the company. A 3:1 rights issue indicates that the stockholder can buy 1 share for every 3 shares that he owns in the company.

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