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Effect of Bonus Issue on Share Value

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(Querist)
25 May 2011 Dear Experts,
When a listed company issues Bonus shares say in the ratio of 1:1 and suppose the Price of the Share in the stock market before Bonus Issue is500/-, does the share value in the stock market after the bonus issue become250/-??

Kindly explain the logic behind your answer....

Thanking you in advance

Prithvi
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CA PARAS BAFNA

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CA PARAS BAFNA (Expert)
20 June 2011 Basically shares are issued out of the reserves. The price of share is 500 when the No of shares in a company were X.

.

After bonus issue nothing changes in the company except the no of shares . No of shares will become 2X.

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The worth of 1 share was earlier Rs. 500/-
after bonus worth of 2 shares become Rs. 500/-.

.

In this way after bonus share price will become half.

.

But it does not remain exactly half. Shares of good companies may be quoted higher than 250/- ... say 280 also. This is due to the fact that liquidity in the shares increases number of trades also.

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