There are various forms in which a shareholder can be benefited when some corporate action is taken. In a public or private company, corporate actions are taken after a board meeting. In this board meeting, the actions are discussed and a resolution is then passed to go ahead with it. Some of the most familiar corporate actions are dividends, bonus, splits and rights issue. We will see each one of them in detail.
Dividends are usually a percentage of profit that the company would like to share with its shareholders. There is no condition that the companies should declare it. But the companies may announce it to keep a good track record so the volumes of shares bought are healthy. So based on the percentage and the number of share one owns, the amount will be credited to the shareholder bank account. A dividend can be announced once or twice a year or never. It totally depends on the company.
Bonus is a way of giving extra shares to its existing shareholders based on a ratio. For example, a bonus ratio may look like 1:3. The first number (1) denotes the number of shares the shareholder will get. And the second number (3) denotes the number of the shares he must already possess. In short, we can say that for every 3 shares held 1 share will be given as a bonus. A bonus announcement by the company is very rare. If you are lucky you can come across one when you hold a stock for a very long time.
As the name suggests it means splitting a share. Every share has a face value. These are in multiples of Rs.1 and Rs.1 being the bare minimum value of a share. So if you possess a share whose face value is Rs.10/- then it can be split into Rs.5/- giving you two shares instead of one. This means that the value of money that you had invested never changed. But for that money, you get more shares instead of the earlier count. For example, if the Rs.10/- face value share is split to Rs.2/- then you will get 5 shares instead of one. A company might announce a split when the cost of the share has gone up too much and it’s not affordable anymore. Unlike dividends or bonus in splits, a shareholder does not gain benefit. The count of shares only increase for the same amount invested.
A rights issue is given out by a company when it wants to raise more money. This money could be used to pay up a debt or expand the business. A rights issue is almost like a bonus but instead of giving extra shares for free, here you are allowed to buy the shares at a discounted rate. The discount rate is set on the current market rate of that particular share. For example, if a share is trading at Rs.100/- and the company chooses to offer a 20% discount then you can purchase the share at Rs.80/-. But there might be a ratio involved specifying how many shares can be bought in discount for how many shares possessed. If played right buying shares during a rights issue can be a good deal.
All these above corporate actions have an announcement, record date and execution date. The announcement date as it suggests is when the issue or action is announced. The record date is the ultimate day given to shareholder to possess the number of shares in their Demat account. This date will be taken in record to count the number of shares. Post which any number of shares sold or bought are not taken into account.
For example, in a bonus issue if its said that 1:3 then it means that the shareholder must possess 3 shares by the record date to get 1 share during the execution date. Yes, execution date represents the day during which the share will be split or credited or issued through rights. So look for these dates under corporate action in your preferred website to know when you need to take action. Now that you have understood these terms well may I suggest a good second read? I have written an article about how I invested all my money in equity and own.