Dont Bother About Bonus

In the stock market ignorance about bonuses is the reason for maximum losses to investors. For example someone holding 100 stocks of a certain company in 1991 may have seen the company regularly paying bonuses to the extent that 100 stocks increased to 200 then 400 then 800 and eventually 1600 stocks. Over the years such holdings could grow to 50000 stocks and with a stock price of ?500 today the valuation of the holding could be ?2.5 crores. Such stories create unrealistic expectations among investors.

Whenever any company declares a bonus many investors buy and hold its stocks influenced by the greed these stories evoke. Companies with weak fundamentals often exploit this mentality by declaring bonuses leading to a temporary jump in stock prices. Promoters use this opportunity to exit leaving ordinary investors to suffer the losses when prices decline.

A prime example is Unitech whose stock jumped from ?156.65 to ?14798.55 in 2006 after a 12-for-1 bonus issue. Another bonus issue in 2007 gave the stock another boost but the stock price eventually plummeted to ?1.05 by 2019.

In the case of large IT companies the growth in stock valuation from a few hundred to crores was due to the increase in the companies' income not the bonuses. Bonuses actually result in a proportional reduction in stock prices. Had famous IT companies like Wipro and Infosys not issued bonuses their stock prices might be in crores today making them inaccessible to ordinary investors. That's why periodic bonuses are necessary to keep stock prices within reach of average investors.

As a company's income and prospects improve its market price also increases proportionately. However when bonus stocks are issued the income per stock is diluted causing the stock price to decrease proportionately. Therefore investing in stocks solely based on bonus declarations should be avoided.

Instead base your investment decisions on the income and profits of the company.