How Share Prices React After Going Ex-Dividend, Ex-Bonus And Ex-Split?

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Many corporates take some steps during the course of the year. Some our mandatory while others are not. Some of these actions include book closure for dividends, stocks splits, bonus etc.

We now study the impact of 3 such corporate actions and how they affect share prices.

1) Dividend

The most important date to remember is the ex-dividend date.

How Share Prices React After Going Ex-Dividend, Ex-Bonus And Ex-Split?
If you have bought the shares before the ex-dividend date, you will receive dividends from the company.

Now, if the ex-dividend date of TCS is July 25, you should buy the share before this date. You will not receive any dividend if you buy the same on July 25 or July 26.

How share price falls after going ex dividend?

Since you are not going to receive any dividends, the share price falls exactly by the amount of dividend declared after going ex-dividends. Let's explain this with an example.

If TCS has declared a dividend of Rs 50 per share and the price before going ex-dividend was Rs 1000, it would drop to Rs 950 after going ex-dividend.

Also read Understanding the terms ex-dividend, book closure and record date

2) Bonus

In the case of bonus shares there is an ex-bonus date. Now, if Reliance has declared a bonus of 1:1, it means that it would give every shareholder one share for every share held.

So, you have to buy the share before they go ex-bonus to receive bonus from the company.

How share prices react after going ex-bonus?

How share prices would react after going ex bonus would largely depend on the bonus ratio. If the bonus is declared is 1:1, the share price would fall by half.

So, if Reliance has declared a bonus of 1:1 and the ex-bonus is on July 25, it would fall by half on this day. A bonus of 1:1 implies one free share for every share held.

3) Ex Split

Normally the face value of a share is Rs 10. In order to make shares more affordable, companies split the share price to Re 1, Rs 2 and Rs 5 face value.

Now, like in the case of bonus and rights issue, you have to buy the shares before the ex-split day to get more shares.

Also read What is a stock split and why it is done?

How share prices fall after going ex-split?

Now, if you buy the shares before they going ex-split, you will be entitled to more shares. Let's us give an example of ICICI Bank.

Let's say ICICI Bank has split its shares from Rs 10 to Re 1. It has reduced the face value by 10 times, which means you will get 10 times more shares, if you buy it before it before going ex-split. The share price will also fall by 10 times.

Does all these corporate actions really benefit the investor. Not really. The price tends to adjust itself lower in the case of all of these actions, whereas you get dividend or more shares as the case maybe.

You should look for the ex-dividend dates very carefully in case you want to avail these benefits. The stock exchanges announce these dates from time to time and in case you do not understand the same, you can contact your broker.

GoodReturns.in

Read more about: dividend, bonus, split, tcs, icici bank
Story first published: Monday, July 6, 2015, 10:55 [IST]
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