Saturday, 3 October 2009

Bonus and Rights issues do not increase the value of a share

Many things in the stock market are not what they seem to be.  Every investor should be on guard. 

Bonus and rights issues can be manipulated for insiders' benefit.  Every investor needs to be aware of this possibility. 

The value of an individual share depends on two factors: 
  • The value of the company as a whole and
  • the number of shares of that company which is outstanding. 
This important principle is the basis for stating that bonus issues in themselves are of no value at all. 

Investors in the rest of the world have understood this principle.  Elsewhere, a bonus issue or a share split is treated as a non-event and nobody ever gets excited about it.  At the ex-bonus date, the price automatically adjusts downward such that the value of the whole company remains the same. 

Why do some local newspaper commentators and speculators go on insiting that a bonus issue is an event of great advantage?

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