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What is the impact of a bonus issue on equity holdings and Futures and Options positions

05 Jul 2023

 

Companies issue bonus shares to reward their shareholders. This approach may appeal to investors but raises concerns about its impact on equities and derivatives positions, notably in the futures and options (F&O) market. To help investors comprehend bonus issues, we'll examine their effects on equity and F&O positions.

What Is a Bonus Issue? 

Company stockholders sometimes receive free bonus shares. Bonus shares are proportionate to shareholdings. This is done to capitalise earnings or increase liquidity and shareholder value. Bonus shares boost market share but do not improve investment value. Companies disperse their reserves or earnings to shareholders. Bonus issues reward shareholders without changing the company's capital structure.

What Is the Impact of Bonus Issues On Equity Holdings?

  1. Increase in share quantity: Existing shareholders receive additional shares due to the bonus issue, increasing the total number of shares they hold.
  2. Dilution of individual share value: The increased supply of shares due to the bonus issue can dilute the value. However, the overall value of the investment remains the same.
  3. Redistribution of ownership: The bonus issue redistributes the company's ownership among shareholders. Shareholders who receive bonus shares see their ownership stake increase proportionally.
  4. Enhanced liquidity: By issuing bonus shares, companies can enhance liquidity in the market. This could attract more investors and increase trading activity in the stock.
  5. Potential impact on stock price: The announcement of a bonus issue can generate positive sentiment among investors, leading to an initial increase in the stock price. 
  6. Impact on dividend payments: Increased shareholdings may lower dividends per share. The company's overall dividend distribution remained unchanged, though.

What Adjustments Would Be required in F&O Contracts?

With the bonus shares, there would be some adjustments to the F&O contracts. Let's take a glance at them.

  1. Lot size revision: Bonus shares boost the futures contract lot size. After the bonus issuance, 100-share lots may become 150-share lots.
  2. Price adjustment: Bonus issues affect the stock's price. This maintains contract value and adjusts share quantity.
  3. Margin requirements: F&O margin needs may alter with lot size and price fluctuations. The new contract parameters may compel traders to deposit more margin or release excess margin.
  4. Profit and loss calculations: F&O profits/losses depend on lot size and price modifications. To effectively analyse position profitability or loss, traders must consider the new contract parameters.

What Is the Impact Of Bonus Issues On Options Contracts?

The changes that would be made to the options contracts by issuing bonus shares have been listed below.

  1. Adjusted contract specifications: Options contracts must incorporate stock quantity and price changes after a bonus issuance. The bonus issue usually changes option contracts' lot size and strike price. To effectively evaluate options positions, traders must know about these modifications.
  2. Change in contract value: The bonus problem may modify contract requirements and value. Options' intrinsic and time values should consider the changed lot size and strike price.
  3. Impact on option premiums: Contract parameters might affect options contract premiums. The bonus problem may affect option supply and demand and price. Traders should watch the options market and consider modifications when assessing premiums.
  4. Adjusted position risk: Options contracts can change risk profiles. The bonus issue's altered contract requirements require traders to review their position's exposure to stock price fluctuations, volatility, and time decay.

Conclusion

In the F&O market, stock quantity and price fluctuations need contract specification revisions. Traders and investors must know these changes to make educated judgments and manage their positions. Investor mood, market conditions, and other variables determine how a bonus issuance affects equity and F&O positions.

 

Related Articles: How to Make Money In F&O Trading | Know About Future & Options Span Margin Calculator | Check The Futures Spread Over Spot Before Trading | 7 Best Bearish Futures and Options Trading Strategies

 

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