Bonus Shares and Stock Splits
The only difference between Bonus Shares and Stock Splits is that for a Bonus share, there is no reduction in face value, which is a number of no real value anyway.
Of course, if the company maintains its dividend yield as per par/face value even after the bonus, the stockholder stands to gain by getting more dividends later.
But the stock holder gains nothing immediately from a bonus share because the EPS, Book value etc now get divided among the new shares too.
So even though the market tends to react favourably to bonus share announcements, share prices tend to rise and the stockholder gets the impression of having received wealth, the reduction in quality of the share will eventually reflect in the market price of the share too.
Rising prices at the time of announcement of bonus shares would, in fact, be a good time to exit one's position in the said stock.
For more details on Bonus shares and splits, see the discussion here; especially the post by the user "Agilent".
Hence in Sesa Goa's case, unlike in this article, the correct approach was to divide the evaluation of the stock by 20 and not just 10.
The market seems to understand this as you can see the drop of almost 18 times after the bonus/split and then more later on.
However reasonable fundamentals and low market levels, still make Sesa Goa a good buy.
The discerning reader may however ask how Hindalco can be a better bargain than Sesa Goa when the stockholder of the former is being asked to pay for the extra shares and Sesa Goa is giving them away free.
The answer is simple:
By paying for the stocks, the fundamental value of the stock itself goes up and Hindalco's stock holders are being asked to pay a sum lesser than what the increase in value will be (since a stock is worth more than just its book value and the total value increase is also more than the book value increase).
Giving stocks away for free adds no value anywhere, unless the stockholder receives some extra dividends at some later date.
Of course, if the company maintains its dividend yield as per par/face value even after the bonus, the stockholder stands to gain by getting more dividends later.
But the stock holder gains nothing immediately from a bonus share because the EPS, Book value etc now get divided among the new shares too.
So even though the market tends to react favourably to bonus share announcements, share prices tend to rise and the stockholder gets the impression of having received wealth, the reduction in quality of the share will eventually reflect in the market price of the share too.
Rising prices at the time of announcement of bonus shares would, in fact, be a good time to exit one's position in the said stock.
For more details on Bonus shares and splits, see the discussion here; especially the post by the user "Agilent".
Hence in Sesa Goa's case, unlike in this article, the correct approach was to divide the evaluation of the stock by 20 and not just 10.
The market seems to understand this as you can see the drop of almost 18 times after the bonus/split and then more later on.
However reasonable fundamentals and low market levels, still make Sesa Goa a good buy.
The discerning reader may however ask how Hindalco can be a better bargain than Sesa Goa when the stockholder of the former is being asked to pay for the extra shares and Sesa Goa is giving them away free.
The answer is simple:
By paying for the stocks, the fundamental value of the stock itself goes up and Hindalco's stock holders are being asked to pay a sum lesser than what the increase in value will be (since a stock is worth more than just its book value and the total value increase is also more than the book value increase).
Giving stocks away for free adds no value anywhere, unless the stockholder receives some extra dividends at some later date.
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