Effect of bonus shares on stock price

[Biker]

Query 1:

ONGC went ex-bonus on 15th/16th Dec with ratio of 1 share for every 2 shares held. Now that is a very generous allotment and I was of understanding that share price will correct correspondingly.

But when I see share price of last 6 months, it has been trading between Rs 150 - 200. Even now it is being traded at around Rs 200. So how come the price did not fall? If the price doesnt fall after such generous allotment then it would be lottery to those who had invested heavily! For eg., with an investment of Rs 1,00,000 you get stock of Rs 50,000 free (if share price doesnt correct).

Query 2:

ONGC had announced record date of bonus on 6th Dec. But it closed at a minor gain of 1% from closing of 5th to closing of 6th. If a company gives such a lucrative offer than doesnt the price should appreciate much more?!

I would be grateful if anyone can clarify this.

 

[tarun1313]

I think you are reading the price from charts.
All charts are showing reduced price now.
For example, the price of ONGC was 300 one day before Bonus share was allotted. And hence price of new share is 200.
Charts are showing 200 so that averages and other indicators don't go in a bad position assuming in o Esau share price broke by 33%


Sent from my iPhone using Tapatalk

 

[travi]

Query 1:

ONGC went ex-bonus on 15th/16th Dec with ratio of 1 share for every 2 shares held. Now that is a very generous allotment and I was of understanding that share price will correct correspondingly.

But when I see share price of last 6 months, it has been trading between Rs 150 - 200. Even now it is being traded at around Rs 200. So how come the price did not fall? If the price doesnt fall after such generous allotment then it would be lottery to those who had invested heavily! For eg., with an investment of Rs 1,00,000 you get stock of Rs 50,000 free (if share price doesnt correct).

Query 2:

ONGC had announced record date of bonus on 6th Dec. But it closed at a minor gain of 1% from closing of 5th to closing of 6th. If a company gives such a lucrative offer than doesnt the price should appreciate much more?!

I would be grateful if anyone can clarify this.

Answer 1:
Bonus Split is generally a sign that Co. is capable of making more profits.
ONGC's net worth does not change, but the shares are issued out of their retained earnings (profits that weren't given out earlier in lay man terms).
The number of shares increase & EPS(Earnings per Share) will decrease and the Co. in turns will target larger profits for better dividends.

If you are thinking in terms of lottery, then yes it is lottery
But that you need to understand in different way.
It is like giving back your own savings to you.
That Inr. 200/share was actually worth Inr. 300, but inr. 100 was held by ONGC in its locker.
So NET effect doesn't change the balance sheet.

As per the shareholder, you can look at it in two ways but its all the same.

1. If you are looking only from inr. 1L and Inr. 1.5L then,
For a long-term investor who sold just before the bonus is the one that feels the loss. Its just like selling a stock at 25 and suddenly it jumped to 45.

2. But if you look at it this way, Its inr. 200 of Cash and Inr. 100 of a fixed asset like Land was transferred from investor to the new buy.

That is why Long-term investors scrutinize balance sheets etc, to know its real net worth, not just face-value of share.

Answer 2:
This is not black Market
Now that you understand that 1L or 1.5L(Liquidated) doesn't change net worth of anybody
Why should price hike? No one wants to buy an over-valued stock.
Why should price fall? No one wants to sell an under-valued stock.

Market being the King, therefore, attains equilibrium.

Small note:
Being a Long-term investor doesn't just mean holding stock for 10yrs
but reading the balance sheet b/w the lines etc so that one can easily anticipate all this and really reap rewards.
Some stocks will pay huge dividend and have no growth in Assets and ppl think its paying well while stocks like these will have low dividend and pile up assets. Its another way of getting ppl to hold for longer.
In rare cases, as an example, if everyone holds ONGC and nobody wants to sell bcos of above reason, then Co is forced to split or bonus to increase liquidity.

 

[travi]

I think you are reading the price from charts.
All charts are showing reduced price now.
For example, the price of ONGC was 300 one day before Bonus share was allotted. And hence price of new share is 200.
Charts are showing 200 so that averages and other indicators don't go in a bad position assuming in o Esau share price broke by 33%


Sent from my iPhone using Tapatalk

ONGC announced a split, a bonus and dividend, so, STOCK Split will calibrate prices, and that is what you see as price change.
Not the bonus.

 

[Biker]

I think you are reading the price from charts.
All charts are showing reduced price now.
For example, the price of ONGC was 300 one day before Bonus share was allotted. And hence price of new share is 200.
Charts are showing 200 so that averages and other indicators don't go in a bad position assuming in o Esau share price broke by 33%


Sent from my iPhone using Tapatalk

Yes I saw the price in charts. Thanks for the explanation. Is it possible to find any chart which gives "real" prices at which stock was being traded before and after bonus?

 

[Biker]

ONGC announced a split, a bonus and dividend, so, STOCK Split will calibrate prices, and that is what you see as price change.
Not the bonus.

Thanks travi for your detailed explanation. Yes I agree that bonus is like putting money from right pocket to left pocket. Though I still dont understand that since networth and everything still remains same than why bonus are looked upon very lucrative by investors.

Also I did not understood your last statement that stock split and not bonus calibrate prices. ONGC only had bonus and not stock split in duration that I am talking about.