When a company makes a profit, it can keep the money in a reserve fund instead of giving it to shareholders as a dividend. If the company uses this reserve fund to give shareholders more shares, it's called a bonus issue. The number of bonus shares a shareholder gets depends on how many shares they already own. This means the company's share capital increases and the reserve fund decreases. Instead of getting a dividend, shareholders get extra shares. 

Understanding Share Splits and Bonus Issues

If a company splits a share with a face value of Rs. 10 into shares with a face value of Re. 2, the company's reserves remain the same. For example, one share worth Rs. 10 becomes five shares worth Re. 2 each. The total value remains the same, but the number of shares increases.

On the other hand, if a company issues a 1:1 bonus, a shareholder with one share worth Rs. 10 face value will receive an additional share of the same face value, essentially doubling their holding. The company's reserves decrease, and the share capital increases.

Why Do Companies Issue Bonus Shares?

Companies issue bonus shares for several reasons:

• Improved liquidity: More shares in the market mean easier buying and selling, which attracts investors.

• Confidence in growth: Bonus shares show that a company is confident in its ability to expand and reward shareholders in the future.

• Affordability: A lower share price makes the stock more attractive to small investors who might have been deterred by higher prices.

However, it's important to note that bonus shares aren't always a positive sign. Some companies may use bonus issues to mask poor performance and boost sentiment artificially.

How Does a Bonus Issue Affect Investors?

A bonus issue doesn't change the overall value of your investment. After a bonus issue, the share price often drops in proportion to the number of new shares issued, so the total value of your shares remains the same.

However, a bonus issue can be seen as a positive sign from the company, which can increase demand for the shares and drive up the price. This can lead to a significant increase in the value of your investment over time, making your shares more valuable.

Why Do Companies Split Their Stocks?

Companies split their stocks mainly to make their shares more affordable and increase liquidity. This makes the shares seem cheaper, allowing investors to buy more shares for the same amount of money as before. essentially, the company is dividing the same pie into smaller slices, making each slice more accessible to investors.

How Does a Stock Split Affect You?

A stock split doesn't change the company's underlying performance or value. The share capital, revenue, and profit remain the same. However, the number of shares increases, which means:

• Earnings Per Share (EPS) decreases proportionally.

• The Price-Earnings Ratio (PE) remains the same.

Let's use an example:

• Before the split: EPS = Rs. 10, PE = 20, Price = Rs. 200 (Rs. 10 x 20)

• After a 10:1 split: EPS = Rs. 1, PE = 20, Price = Rs. 20 (Rs. 1 x 20)

• But now you hold 10 shares, so your total value remains the same: Rs. 20 x 10 = Rs. 200

In short, a stock split doesn't change the underlying value of your investment, but it can make the shares seem more affordable and increase liquidity.

Why Does the Market React Positively to a Stock Split?

The market often reacts positively to a stock split because it sees the move as a sign of the company's confidence in its future growth. The split increases the number of shares traded, making the stock more liquid and attractive to investors.

While a bonus issue clearly benefits existing investors, a stock split is more of a technical change that doesn't directly benefit existing shareholders. However, it can be good news for new investors who want to buy the stock more cheaply.

So, the positive market reaction is mainly due to the perceived confidence of the company and the increased liquidity of the stock, making it more appealing to potential investors.