What are stocks issues and ratios in stock market investment?
Occasionally, a public listed company will issue additional shares which will be done in proportion to their existing shareholding volume for its shareholders. Such an exercise is carried out to increase the shares which are being held by its shareholders and it is commonly done using ratios like 1:3 or 1:2 which means that the shareholders actually is given additional shares of the company.
This is known as issuing of Bonus for shareholders where it would surely be a beneficial and profitable move for them. Most of the large corporations would issue bonuses especially on the financial years when they record huge profits. In most circumstances, the companies issue the bonus to the shareholders as a reward for holding shares in its company.
Companies like FMH (Freight Management Holdings) Bhd have issued bonuses to its shareholders while the likes of Tong Herr had issued a one-for-two bonus previously. If you are a shareholder and a 1:2 bonus is declared, you would have doubled your shareholding. This means that if you hold 2 lots of the shares, you would have owned an additional lot after the bonus is declared. If you own only 1 lot, you would own an additional half lot of the particular share.
In most cases, when the bonus issue is announced, the share price will decrease and it will take time before it is determined by the market forces later. But this would only be a temporary situation and shareholders who hold the bonuses would be advised not to sell their shares until the price stabilises.
Alternatively, a company can split its shares to create more outstanding shares in the market. This is usually done when the public listed company feels that the share price in the market is too high and is deterring investors from buying its shares. Hence, it would undergo a share split process whereby the shares are increased by splitting them without having to affect its paid-up capital. The ratios used in share splits could be like 2:1 where the result would show an increase of shares available in the market. By doing so, the share price would be lower and it would be more attractive and more affordable for its potential buyers and investors.
A recent share split exercise was proposed by Digi.com, the third largest mobile communications operator in Malaysia where they filed with Bursa Malaysia to have its stocks split into 10 new shares (10:1). This was done to increase its liquidity and to be more affordable for more investors and buyers which would adjust its share price to the market accordingly. In 2009, healthcare group KPJ Healthcare Bhd also proposed a 2:1 share split when its share price was around RM6.09.
A share consolidation exercise is carried out when there are too many shares in the market and the company is looking to reduce them. This is in contrast and the exact opposite of how the share split operates. A share consolidation exercise is carried out where it will basically combine the shares that are being held by the investors. For instance, if you hold 10,000 shares and a 10:1 share consolidation exercise is carried out, you will end up with 1,000 shares. This will however not change the terms of percentage of shareholdings among the investors although the number of shares have been reduced.
Fundamentally, it will result in an increase of the price of the shares by which the number of shares were consolidated where for example, if the price of the particular share was traded at RM1.00, then if the consolidation is carried out in a 10:1 ratio, then it would result in the share being traded at RM10.00. Where this is concerned, it is will help to increase the price of the share of the particular company. It is very important that you are aware of such exercise which will usually be announced in public while a document will be mailed to your address. This is because if you don’t, then you might still be thinking that your share is worth RM1.00 and would have sold it around that price.
Dividends are given out by public listed companies in Bursa Malaysia when the company recorded profit for a certain financial year. This is where the company would be giving out a part of the income and profit to its shareholders and paying out dividends could affect the equity of the company because if they do so, it would consequently reduce the distributable equity of the PLC. For example, when a dividend of RM0.20sen is issued, you will be receiving an additional RM200 if you hold 1,000 shares of the company. Typically, it is the income that you receive for being a shareholder of the particular PLC in Bursa Malaysia.
Dividend are applicable to you no matter how many shares you hold which means that the more you have, the higher you will stand to receive. Basically, the dividend payout is a cut of the profits that the business earned for the financial year and it is not a guaranteed payout. You will find that dividends are not a common method among high-growth companies because they will usually need to reinvest their funds and profits back into the business in order to sustain or for future expansions which might be rapidly growing. However, you will find that the more established companies would subsequently declare dividends as they are more stable and can always afford to do so.
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