Investing

Link :
Investfair
rediffNEWS

For someone who usually doesn’t care much about investing, I admit that this week I have learnt quite a few things about what companies does to their shares.

I had to attend a briefing on Friday regarding the company giving out bonus shares. And my colleagues started explaining things like we should exercise all the shares that we can (although I have none to begin with) and that the share prices will drop soon once bonus shares are given out. I ended up doing a research on bonus shares today.

Bonus share is supposedly free share of stock given to current shareholders in a company. Thus people believed that this is a good thing because you are getting more shares at no extra cost and it is taken as a sign of good health of the company.

But is it really a good thing? A bonus issue adds on the total number of shares in the market. This is a dilution in equity. Quoting my company’s example, imagine we are getting 5 lots initially. With a bonus issue of 5:2, we will be getting 7 lots. Based on the formula:
Earnings Per Share (EPS) = Net Profit / Number of Shares

The earnings of the company will have to be divided by a larger number of shares. And since the profit is constant, the EPS can only go down. Thus in theory, the stock price will decrease proportionately to the number of new shares.

However there is still a bright side one can hope for.
1. As the stock is more liquid currently, with an increased amount of shares it is easier to buy and sell shares
2. It is a signal that the company is confident to increase its profits and distribute dividends on all these shares in the future.

Anyway with the implementation of bonus shares, the company plans to adjust those shares that cannot be exercised for the moment. Interestingly, they had mentioned giving us more share allocations and reducing the price. But when I discussed it with my parents, they told me it should be an either/or option because no company will adjust both the share allocations and the pricing. Hearing their logic, I have to admit maybe it really is an either/or option. Guess I will know the answer in one to two month’s time.

Coincidentally, my mum was asking me to check another company on its consolidation of shares. Another term for it is a reverse stock split where it reduces the number of outstanding shares without any modification of the Company’s capital. My mum told me that certain companies will consolidate its shares to reduce the number of shares available in the market. This will help reduce the volatility of the share price. And to most people, consolidation is a bad news. If the company had planned that for every 10 shares registered in the name of each shareholder to be consolidated to constitute 1 consolidated new share, then if I have 30 lots, I will end up having 3 new shares. In other words, the value per share increases although there is no assurance or obligation that the post-consolidation share price will be increased to the same rate as the consolidation ratio. Whether the share price will increase significantly is unknown thus usually people will sell their shares.

Another problem it will cause is the odd lot problem as if you own 3 lots i.e. 3000 shares, you will now end up getting 300 shares which is what people termed as odd lots. Odd lot is problematic to those who do his/her own trading. In addition, the company might round down to the nearest whole consolidated share and any fractions might be disregarded. I guess one cannot blame them from being so “ruthless”.

While surfing, I saw that there is an InvestFair next weekend. Hmm maybe I will pop by to increase my understanding of investing.