8. Understanding corporate actions like dividends, bonuses and buybacks – Transcript

00:07corporate actions are ways that companies reward shareholders in fact there are many different kinds of corporate actions that we'll discuss in this video starting with dividends hi my name is pratik singh and in this video we're going to talk about all the different kinds of corporate actions and the timeline associated with it

00:34the first type of corporate action are dividends dividends are a way for corporates to distribute a part of the profits it's earned to its shareholders for example wipro in the year 2021 declared a dividend of rupees one and a dividend is always done on a per share basis and it's expressed with regards to its face value now in this time when the dividend of rupee 1 was announced the

01:01face value of wipro was rupees 2. hence it is said that the dividend payout is 50 unlike the interest on debt payments where the company has to pay the interest for the money that they have taken on debt a dividend is not mandatory a company does it at its discretion to reward its shareholders if the management think it makes sense there are a bunch of other corporate actions as well but before we explore

01:27that let's understand the timeline of all corporate actions starting with the announcement date it's pretty self-explanatory this is the date that the corporate action is announced to the public then is the record date this is the day where the company makes a record of or its shareholders who are eligible for that corporate action in this case maybe it's a dividend after this is the x date but the x date is actually two

01:53days before the record date the x date is the day where the register of all the people who own the company shares is made this is two days before the record date because the typical settlement cycle is t plus two now what's the impact on the share price once the stock goes x dividend the stock price will usually fall to the extent of the dividend paid out the next corporate

02:18action is a bonus the bonus refers to bonus shares these are free shares that shareholders get out of the reserves of the company and is usually in a fixed allotment like one is to one or one is to two let's understand how this works with the help of this table here the bonus issue of one is to one let's suppose you had a hundred shares the hundred shares now becomes two hundred

02:43the price of the stock let's say was 75 will now half and become 37.5 this means before the bonus the value of your shares was 7500 and after the bonus the value of your shares is still 75. notice that the value is exactly the same but the number of shares have doubled and the price has halved now let's look at the three is to

03:08one example same thing the ratio has changed so in this case we have 30 shares before the bonus after the bonus you get 120 because 30 times 3 is 120 notice that the price before the bonus was 550 divide that by three and after the bonus the price of the share will become 137.5 and also notice that the value is

03:33exactly the same for both the bonuses so just like we saw the one is to one ratio the bonus could also be in say a threes to one ratio or a five is to one ratio in all these cases remember although you're getting these bonus shares the value of your shares doesn't change companies issue bonus shares to increase retailer participation and it's especially effective if the share price is extremely high because the number of

03:59shares increases and the share price itself falls in value making it easier for retail investors to participate in those shares just like we saw in dividend the bonus also has an announcement date an x date and a record date the next type of corporate action is a split in a split the price of the share decreases and the number of shares in the market actually increases it's also done in a ratio so if there's a one

04:25to two ratio and the face value of a stock is say rupees 10 then that rupees 10 face value stock now becomes rupees five and the number of shares outstanding doubles the next type of corporate action is a buyback a buyback can be thought of a way of a company investing in itself so what it does is the company uses the profits it has to buy shares in the open

04:49market it's also a way to re use its profits to invest in itself so existing shareholders usually get offered to buy shares at a premium to the current market price thereby this entire corporate action is seen as a bullish thing to buy backs and usually the stock price rises there are two ways that a buyback can be executed by a corporate the first way is an open market purchase where the corporate simply goes to the

05:16open market and makes that purchase the second way is through a tender offer or through a fixed price offer where they offer the buyback through a fixed price and this is usually through a mechanism you might have to log in to say console to actually participate in that in fact we have a really nice article over here so you can understand how this works in detail now there could be many reasons why a corporate is performing a buyback some

05:43of them is maybe to improve the profitability on a per share basis it could be to consolidate their stake in the company to prevent other companies from taking over to show confidence of the promoters about the company and to support the share price from declining in the market generally speaking a buyback shows confidence of the company in its own business and hence is a bullish sign the last type of corporate action we learn

06:10about is the rights issue now rights issue is a way for a corporate to raise fresh capital but it can't do so by doing another ipo because it's already public the way it does it is that it raises money from existing shareholders by allowing them to invest in the company thereby a right to purchase shares to invest in the company again called the rights issue rights issues are generally priced lower than the

06:37prevailing current market price and it's a privilege for existing shareholders to actually access it because well they're existing shareholders there are a few other corporate actions which we've not covered here but you can learn on the varsity chapter these are things like the ofs rights rights entitlement mergers and acquisitions and the reverse merger so i hope you found this video useful we covered all the main corporate actions in the next video we'll talk

07:03about transaction types you already know how to buy and sell stocks but there are different order types that you might find really useful so see in the next video for that key takeaways from this video are