Bonus & Split Psychology explained

June 20, 2024 3 min read

The Impact of Bonuses and Splits on Stocks

Today, let’s talk about bonuses and stock splits, and how they affect investors. You might have heard about companies giving bonuses like one-to-one or three-to-one. This means if you have one share, you get additional shares for free. Many people think they are getting something extra, like a gift from the company for being loyal shareholders. But this perception can be misleading.

Understanding Bonuses in Stocks

When we hear the term “bonus,” we usually think of something extra, like a bonus at the end of the year for a job well done. In the stock market, however, a bonus means your existing shares are taken back and you are given more shares of the same company in the same proportion. For example, if you had one share worth 100 rupees, and the company announces a one-to-one bonus, you now have two shares worth 50 rupees each. The total value remains the same.

The Psychological Impact of Bonuses

Even though the value of your shares doesn’t change, the announcement of a bonus can make the stock price go up. This happens because people perceive the bonus as something special, thinking the company is doing really well. For instance, if a stock is priced at 100 rupees and a bonus is announced, the price might jump to 150 rupees. However, this increase is often based on perception rather than actual financial improvement.

The Purpose of Stock Splits

Stock splits serve a different purpose. When a company’s share price becomes very high, it can be hard for small investors to buy even one share. For example, if a share is priced at 30,000 rupees, not many people can afford it. So, the company might split the stock to make it more affordable. They might change one share worth 30,000 rupees into ten shares worth 3,000 rupees each. This makes the stock more accessible to retail investors.

Promoters’ Strategies with Splits and Bonuses

Promoters often use bonuses and splits to their advantage. These actions can increase the perceived value of the stock. Before the split or bonus takes effect, the stock price usually rises, creating excitement among investors. For instance, if a stock is going to be split or a bonus is announced, the price might rise significantly as people rush to buy shares. This can make the company’s market cap appear higher temporarily.

Let’s look at Motilal Oswal as an example. There was a buzz about a bonus in March. Insiders knew about it and drove the price from 375 to nearly 675 rupees. After the bonus was announced and recorded, the price went up but later settled to a more manageable level for Indian shareholders.

Nvidia’s stock went from 200 to 1200 rupees. On June 11, they split the stock ten-to-one. Now, a 1200 rupee stock is 120 rupees. Even though fractional shares are available on Nasdaq, this split made it feel good for investors. One share turning into ten feels like a bonus.

Stock splits and bonuses play on investor psychology. Promoters use these tactics to create excitement and drive up prices. But these actions do not change the company’s financial health. They are more about perception than real value.

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    Bonus & Split Psychology explained