Market consolidation – Still Hold indication

Blog meant for 21 June 2017 Wednesday

Dear friends,

Our markets consolidated today after rallying well yesterday. Nifty closed flat at 9653, down 4 points. The global cues are also little weak tonight as European and US markets are all trading negative.

As per 30 days moving average, Nifty is in Hold zone.
The indications for short term for individual stocks are as follows:

THE HOLDS ARE – HDFC BANK, MARUTI, HDFC, DIVISLAB, Titan, ITC, Reliance, M&M,

Wait to Sell – Axis Bank, Asian Paint

Buy –  ACC

Wait to Buy – SBI, YES Bank

Don’t Buy –  LUPIN, BHEL, ONGC, Infosys, TCS, L&T

Do not neglect long term investments by getting distracted with short term fluctuations. The returns we get from long term can never be compared to short term profits since we will get the benefit of compounding when we invest for long term.

Continue monthly investments on a regular basis for long term.

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Question of the Day

Question – Today, ICICI Bank shares have fallen from around Rs.318 per share to Rs.292. Why the sudden fall of around 8%?

Answer – This is a common doubt which comes in every new investor’s mind. Sometimes a good company’s shares suddenly falls by big percentage even though no major negative news was announced.

However, what we may not have noticed is that ICICI Bank announced a bonus issue of 1:10 on 3 May 2017. Today, 20 June was the date from which the shares will trade ex-bonus. 

Whenever a bonus issue is announced, for example in the ratio 1:10, the number on the left is the number of shares you will get as bonus and the number on the right is the number of shares you would need to hold for getting the bonus shares.

So, 1:10 means that you will get one bonus share for every 10 shares held. If you do not hold 10 shares, then you will not be eligible for the bonus share issue. 

Usually a company announces a record date as on which if shareholders are holding that particular company’s shares, they are eligible for the bonus. 

The date from which the bonus shares are credited to the shareholder’s account is ex-bonus.

Suppose, an investor had 10 shares of ICICI Bank as on record date, then he will be eligible for 1 share bonus. Let us assume that the share price of ICICI Bank just before the ex-bonus date (day on which bonus gets credited to demat account) is Rs.318/-

Therefore, the total value of 10 shares held is 10 X 318 = Rs.3,180/-

Since the bonus issue is not meant to get any undue advantage to the shareholders, the value of the investment should be still around Rs.3180 even after the bonus. The only change should be that the number of shares held by the shareholder will be 11 instead of 10.

Hence, 3180 divided 11 = Rs.289 per share must be the share value of each share so as to adjust for the bonus issue. 

As you can see, the share price of ICICI Bank is Rs.292 at closing time today.

This is what happens whenever a bonus issue comes into effect. 

Many investors panic when one of their shares falls suddenly on a day. Apart from other reasons, a bonus issue or a stock split could be a reason for this fall.

Bonus issues are done to reward shareholders for their faith in the company. It does not require any major effort since the company is just creating some additional shares in their balance sheet and no physical change happens. 

In the coming days, we will explain about stock split and how it works.

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All the best!

Dr.Bharath Chandra