Monday, February 13, 2017

Difference Between Bonus Share and Share Split


Picture Explains Distinction Between Bonus Share and Share Split
Picture Explains Distinction Between Bonus Share and Share Split

Actual Question:

How do I calculate bonus share and share split?

Answer:

Dear Friend!
Let us deal with both parts of your question separately.

Bonus Shares:

In the case of bonus shares the company issues fresh shares by utilizing the reserves for issue of fresh shares as a gesture of rewarding investors. Your account for the scrip with your broker will show the recipt of shares as a purchase with zero cost along side your regular purchases. Rural Electrification Corporation (REC) had issued a 1:1 bonus issue in August 2016 and fixed 29th September as the record date for determining the eligible investors. The following table shows the actual bonus shares received in our ‘Portfolio 2K15’, which incidentally is 193 based on the total holding on 9th September 2016.

Purchase
Date
Qty
Rate
Cumulative Quantity
13/02/17
30
146.79
491
05/01/17
40
126.7
461
05/12/16
25
132.07
421
06/10/16
193
0
396
05/10/16
10
133.92
203
09/09/16
6
248.22
193
04/08/16
9
216.78
187
15/07/16
8
203.92
178
11/07/16
8
194.02
170
14/06/16
7
165.65
162
24/05/16
3
159.38
155
13/05/16
3
169.78
152
11/05/16
5
169.31
149
20/04/16
3
164.58
144
14/03/16
4
174.09
141
10/03/16
15
168.85
137
04/03/16
9
168.52
122
24/02/16
4
160.21
113
12/02/16
4
171.01
109
03/02/16
5
187.31
105
18/01/16
15
196.6
100
07/01/16
4
222.11
85
08/12/15
20
223.9
81
14/10/15
17
264.77
61
27/08/15
4
255.88
44
04/08/15
10
274.34
40
22/07/15
10
284.39
30
12/06/15
4
277.99
20
07/04/15
6
327.68
16
06/04/15
10
334.71
10

491



As far as tax treatment is concerned, even though I am not a tax expert, the bonus shares are deemed to be issued on 6th October 2016 the day they are credited to your account. The cost of acquisition is zero. In case we sell the shares before 5th October 2017 the entire sale proceeds relating to these 193 bonus shares will be treated as short-term capital gains. If sold after 5th October 2017 the entire sale proceeds are long-term capital gains for which there is no tax in the present tax scheme.

Share Split:

There is no real example of share-split in our portfolio. Therefore let us assume that instead of a bonus shares REC split the shares with the face value of Rs.10 into two with the face value of Rs.5 each. In such a case the table will look as follows:

Date
Purchase
Share-Split
Qty
Rate
Split Quantity
Split Rate
13/02/17
30
146.79
30
73.40
05/01/17
40
126.7
40
63.35
05/12/16
25
132.07
25
66.04
05/10/16
10
133.92
10
66.96
09/09/16
6
248.22
12
124.11
04/08/16
9
216.78
18
108.39
15/07/16
8
203.92
16
101.96
11/07/16
8
194.02
16
97.01
14/06/16
7
165.65
14
82.83
24/05/16
3
159.38
6
79.69
13/05/16
3
169.78
6
84.89
11/05/16
5
169.31
10
84.66
20/04/16
3
164.58
6
82.29
14/03/16
4
174.09
8
87.05
10/03/16
15
168.85
30
84.43
04/03/16
9
168.52
18
84.26
24/02/16
4
160.21
8
80.11
12/02/16
4
171.01
8
85.51
03/02/16
5
187.31
10
93.66
18/01/16
15
196.6
30
98.30
07/01/16
4
222.11
8
111.06
08/12/15
20
223.9
40
111.95
14/10/15
17
264.77
34
132.39
27/08/15
4
255.88
8
127.94
04/08/15
10
274.34
20
137.17
22/07/15
10
284.39
20
142.20
12/06/15
4
277.99
8
139.00
07/04/15
6
327.68
12
163.84
06/04/15
10
334.71
20
167.36

298

491


In the case of share-split the number is doubled and the rate is simply halved. The date of acquisition is the same as the date of original purchase. The logic behind it is that the same share has been split into two – no new share is created – therefore the original date of acquisition remains intact.

The tax treatment is the cost of acquisition (the halved cost in this example) will be deducted from the selling price to arrive at the capital gains. The long or short term is determined with respect to the original date of acquisition.

Thank you,

With Best Regards

Anand

Bet on Good Companies Not Times

Value Investors bet on good companies but not good economic times and conditions
Value Investors bet on good companies but not good economic times and conditions

Actual Question:

Sir, I can understand initial fundamental terms as PE ratio, D/E, Book Value , Current Ratio, sales, income, Base price, net sales per share and some more basic terms also, but how can I assume that this or that sector is going to perform in the given economic or in the expected future economic scenario?

Answer

Dear Friend

Value investors do not worry too much about which sector will do well in the given and future economic scenarios.

Good companies that have existed for a 100 years would have seen many economic ups and downs. Therefore we bet on their ability to manage those situations.

Commodity stocks like oil, gas, metals, shipping have been hot very badly in the last couple of years. I bought even when their earnings were in red (loss) because the prices will eventually pick up. These shares were available at a discount to their book values. One should buy these companies during such situations at low valuations. Eventually the prices will improve and they will reward the investors handsomely.

This means we bet on good companies and NOT good situations.

This is value investing.

Thank you,

With Best Regards

Anand