When a company whose stocks you own, announces bonus shares or a stock split, is that good news for you? Do you really gain after such announcements by companies? UDAYAN RAY Welcome to Fundoo Money, your 24X7 buddy on all matters related to personal finance. In this web series, we are discussing various things that you need to keep in mind while investing in stocks. This video will try and help you understand and become a smart investor. Now, in this particular segment, we are going to be discussing various things an investor needs to keep in mind when it comes to bonus shares.
Well who doesn’t love a bonus? It so happens that you also get bonus shares where you are getting a share from the company as a bonus share. Now what exactly is bonus share? Is it something that people should be celebrating? To help us understand that we have with us stock market expert Mohit Satyanand.
Hi Mohit!
MOHIT SATYANAND Hi Udayan!
UDAYAN RAY Mohit, bonus shares; we Indians love anything which has got the words like free, discount, bonus. Is it something which an investor should be celebrating?
MOHIT SATYANAND One of my favorite economists Milton Friedman said:“ There is no such thing as a free life”. Okay? So when we look at bonus shares, here’s a company and now the company says we have 10,000 shares. Now we are going to make these into 15,000 shares. And instead of having one share you now have one and half shares. Does it change the size of the pie? No. Does it change the percentage of that pie I have? No. it’s like thinking that this cake which had 10 slices now has 15. Is there more cake on the table? No. It’s an illusion. I don’t care for bonus shares.
UDAYAN RAY So, that’s very, very simply explained. But Mohit what about stocks split? What happens then? MOHIT SATYANAND It’s exactly the same thing. There is no difference. Yesterday I cut this pizza into 8 slices, today I have cut it into 12 slices. Is there more pizza on the table? No.
UDAYAN RAY Well that really, really simplifies the whole thing. So next time there is a bonus share announcement it is really nothing much to celebrate about. I think the critical part Mohit is to look at company’s earnings that we have been mentioning in the previous videos in the series.
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