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icing on the cake for long-term investors

icing on the cake for long-term investors

how holders can effortlessly earn exponential returns from shares
December 4, 2021
4 min read
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icing on the cake for long-term investors

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publicly-listed companies reward their shareholders in many ways. they can give out dividends, buy back shares, have a rights issue, or just distribute free shares through a bonus issue. the last of those is a rare occurrence, but here’s what the event means for shareholders.

bonus issues are the distribution of the company’s profits in the form of free shares to existing shareholders instead of being given out as cash dividends. 

a company first announces the issue of bonus shares and the ratio in which it will be distributed, and then fixes a record date which is considered to finalise the holding of shares in the shareholders demat account. let’s say firm X decides to issue bonus shares in the ratio of 1:1. then, as per the shareholding on the record date, shareholders will receive one ‘free’ share for every share they hold. 

in case of a bonus issue the book value of the company will remain unchanged but the price of its shares will adjust as per the ratio of the issues. in the above example, if earlier the stock of firm X was trading at Rs 100/share, then it can be adjusted to Rs 50/share after the bonus issue. 

when a company issues bonus shares it increases the liquidity of the stock which can encourage retail participation as the denomination per stock comes down and it becomes more affordable for investors to purchase.

in case one does not own the stocks of a firm that has announced a bonus issue, they have time till the ‘record date’ to purchase some if they think the price of the stock is likely to appreciate post the bonus issue. 

while this can be viewed as a trading window to make a quick buck, history tells us those who stay invested in companies for the long term tend to reap the benefits of compounding such shareholder rewards.

take the example of Infosys. since the IT major got listed in the 90’s it has distributed bonus shares on eight occasions. the first one was announced in 1994 in the ratio of 1:1 and the latest happened in 2018 where again the ratio was 1:1.

Infosys listed in 1993 and the IPO price was Rs 95/share then. if you had bought, let’s say, 100 shares (at a total price of Rs 9,500) and held on to them, you would end up having 51,200 as of now.

currently, Infosys is trading at around Rs 1,740/share. this means that your initial investment of Rs 9,500 would have grown to (51,200 multiplied by 1,740) Rs 8,90,88,000.

while there is no guarantee that stocks which give out bonus shares will grow and survive like Infosys, it’s clear that the market rewards those who are patient and have high conviction in their investments.