There are many corporate events and this article explains the most common occurring ones like Dividends, Rights, Split and Bonus.

DIVIDENDS

Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. A company’s dividend is decided by its board of directors and it requires the shareholders’ approval. However, it is not obligatory for a company to pay dividend. Dividend is usually a part of the profit that the company shares with its shareholders.

Types of Dividends:

There are various types of dividends a company can pay to its shareholders. Below is a list and a brief description of the most common types that shareholders receive.

Types include:

• Cash – this is the payment of actual cash from the company directly to the shareholders and is the most common type of payment. The payment is usually made electronically (wire transfer), but may also be paid by check or cash.
• Stock – stock dividends are paid out to shareholders by issuing new shares in the company. These are paid out based on the number of shares the investor owns.
• Assets – a company is not limited to paying distributions to its shareholders in the form of cash or shares. A company may also pay out other assets such as investment securities, physical assets, real estate, and others. (Not used mostly)
• Special – a special dividend is one that’s paid outside of a company’s regular policy (i.e., quarterly, annual, etc.). It is usually the result of an excess cash build up.

RIGHTS ISSUE

A rights issue is an issue of shares by a Company where new shares are issued to the existing shareholders of the Company in proportion to their existing holding in the Company. This ensures that the promoters shareholding is not diluted. The existing shareholder has the right to be allotted the minimum number of shares in proportion to his holding and more if he applies for additional shares and some shareholders not exercising their right. The existing shareholder gets the option to either exercise his right and apply for the share or he may choose to transfer his right to some other person of his choice or he may completely opt out of the issue and fail to apply. In cases where right is not exercised the left-over shares are allotted to other shareholders who have applied for additional shares.

STOCKS SPLIT

A stock split increases a company’s total number of shares outstanding. It does not alter the firm's market value or the proportionate ownership of existing shareholders. Generally, a stock split is expressed as a ratio. For example, 2:1, 3:1, etc., which means that the stockholder will have two or three shares, respectively, for every share held earlier. This distribution rate will determine exactly how many shares of stock the firm hands over to its existing shareholders. Stock split is a way in which a company divides its existing shares into multiple shares to increase the liquidity of the shares.

Mostly, a company decides to split its stock so as to reduce its share price. High prices can act as a barrier for new and smaller investors. A stock split reduces a company's share price to a more affordable price level to a broader range of investors. The goal of a stock split is to make the stock accessible to as many investors as possible.

How It Works

When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.

For example, a company has 2 lakhs shares outstanding. The price of those shares is Rs.100. So, the firm's total market value, or market capitalization, is Rs. 2 crores (2 lakhs x Rs. 100/share). After a 2:1 stock split, the firm's number of shares will double to 4 lakhs, while the value of those shares will be cut in half to Rs. 50. But, the company's total market capitalization will remain the same at just Rs. 2 crores (4 lakhs x RS. 50/share).

Also, if an investor has 100 shares of the above company before the split. Before the split the shares would have been worth Rs. 10,000 (100 x Rs. 100/share). After the stock split the investor will then have 200 shares, but the firm's share price will be cut in half to Rs. 50. Thus, the net value of the shares will remain unchanged at Rs. 10,000 (200 x Rs.50/share).

BONUS SHARES

A bonus issue is a stock dividend, allotted by the company to reward the shareholders. The bonus shares are issued out of the reserves of the company. These are free shares that the shareholders receive against shares that they currently hold. These allotments typically come in a fixed ratio such as, 1:1, 2:1, 3:1 etc.

If the ratio is 2:1 ratio, the existing shareholders get 2 additional shares for every 1 share they hold at no additional cost. So, if a shareholder owns 100 shares, then he will be issued an additional 200 shares, so his total holding will become 300 shares. When the bonus shares are issued, the number of shares the shareholder holds will increase but the overall value of investment will remain the same.
Companies issue bonus shares to encourage retail participation, especially when the price per share of a company is very high and it becomes tough for new investors to buy shares. By issuing bonus shares, the number of outstanding shares increases, but the value of each share reduces.