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Demystifying StocksShare Market Basics-Dividend, Stock split, Auction, Bonus, Short selling & Settlements
Simply put, dividends are profit sharing.
They are compensation for the investment made by the shareholder in the business.
Dividend is one very tangible benefit an investor enjoys because it is hard cash in his hands.
Almost all investors prefer to receive some dividend as, it is a yearly reminder that all is well with their money. They are not much concerned about the exact extent by which the value of their investment has grown so long as some growth is evident or rather a decline is not seen.
Finally, dividend is a way of letting us have our cake and eat it too. Not the whole cake, just a piece out of it. The initial investment remains intact (it even grows) and also gives us some money for enjoyment.
What are Dividends?
A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.
The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed. Thus a stock split is generally applied to shares considered expensive in order to make them more attractive through the price which is reduced due to the split.
The move is generally seen to improve the liquidity of the scrip as more investors participate due to the smaller ticket size. It is also seen as a sentiment booster since it expresses confidence on the part of the management to distribute dividends on stock in the days to come.
What is stock split?
Auctions are conducted on the exchanges when, for some reason, shares (physical or demat) are not delivered to the exchange on time.
Exchanges conduct auctions to penalize the party for defaulting on delivering the shares on time, and thereby to protect the sanctity of settlements.
It is imperative that auctions are held so that pay-in and pay-out of shares take place on time, in accordance with the settlement cycle of the respective exchanges.
What is share auction?
Shares come under the hammer when they have been either delivered short or found to be objectionable by the exchange. Based on the reasons why shares qualify for auction, they have been categorized into two types:
A. Auction due to shortagesB. Auction due to objection
Why shares are auctioned?
Share bonuses are an increase in the amount of shares of a company with the new shares being given to shareholders.
For example, if a company was to issue a 5% share bonuses, it would increase the amount of shares by 5% . If you owned 100 shares in the company, you'd receive 5 additional shares.
This, however, like the cash dividend, does not increase the value of the company.
What are Bonus shares?
The biggest benefit of share bonuses is that shareholders do not generally have to pay taxes on the value of dividend.
Most share bonuses are in the 5% to 15% range.
Neither cash nor share bonuses changes the shareholder's net worth in the company.
Cash-rich firms favor cash dividends, while growing firms or firms seeking to reduce their share prices may opt for share bonuses.
A share bonus is not taxable until sold. In contrast, a cash dividend is always immediately taxable.
What are Bonus shares?
Short-selling is the sale of shares that the seller does not own at the time of trading.
It is a trading technique an investor uses to profit from the falling price of a stock.
It is a tactic of selling a stock without owning it, with the view that the price is likely to fall further and, hence, there is profit to be made by buying it back at a cheaper price.
It is considered a very risky technique as it involves precise timing and because it goes against the overall direction of the market.
What is short selling?
Supporters of short-selling, view the practice as a desirable and essential feature of a securities market. They argue that in a weak market, short-covering of positions taken at the beginning of a downturn, would arrest the declining trend.
Critics of short-selling, on the other hand, are convinced that short-selling poses potential risks and can easily destabilize the market directly or indirectly.
Supporters & critics of short selling
A rolling settlement implies that all trades have to settle by the end of the day.
Hence the entire transaction, where the buyer has to make payments for securities purchased and seller has to deliver the securities sold, have to be completed in a day.
In India, we have adopted the T+2 settlement cycle, which means that a transaction entered into on Day 1 has to be settled on the Day 1 + 2 working days. 'T+2" here, refers to Today + 2 working days.For instance, trades taking place on Tuesday are settled on Thursday.
What are rolling settlements?
In order to check the volatility of shares, SEBI has come up with the concept of Circuit Filters.
Under this, SEBI has specified the fixed price bands for different securities within which they can move on a given day.
What are Circuit filters & trading bands?
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