Cum-bonus & ex-bonus shares

Cum-bonus:The share is described as cum-bonus when a purchaser is entitled to receive the current bonus.

ex-bonus shares:A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future.

A bonus issue is taken as a sign of the good health of the company.

When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus.

After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.

So how does a stock's price change after a bonus announcement?

Let's take a few recent examples:

The record date for Matrix Labs' 4 for 1 bonus was January 13, 2005. At the time, the stock price was around Rs 2,116.

Ex-bonus, the stock adjusted to Rs 423.

Note: Rs 423 is Rs 2,116 divided by 5, which is entirely appropriate becaause there are now 5 stocks where there used to be 1.

Or take Aftek Infosys, which gave a 1 for 2 bonus on January 27, 2005. The stock was Rs 109, falling to Rs 73 ex-bonus.

Note again how Rs 73 is exactly two-thirds of Rs 109. But while the stock price of Aftek Infosys rose substantially prior to the bonus, Matrix Labs had not.

Glenmark Pharma's 1:1 bonus on March 4 saw the stock correcting from Rs 593 to Rs 296.

Will the price change after a bonus issue?

A bonus issue adds to the total number of shares in the market.

Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares.

This is referred to as a dilution in equity.

Now the earnings of the company will have to be divided by that many more shares.

Earnings Per Share = Net Profit/ Number of Shares

Since the profits remain the same but the number of shares has increased, the EPS will decline.

Theoretically, the stock price should also decrease proportionately to the number of new shares. But, in reality, it may not happen.

That's because:

i. The stock is now more liquid. Now that there are so many more shares, it is easier to buy and sell.

ii. A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future.

A bonus issue is taken as a sign of the good health of the company.

When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus.

After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.