We’re happy to announce that we’re the first brokerage in India to have introduced corporate actions on charts on all equity & futures near-month scrips on NSE as recently implemented and announced on the Notice Board. Corporate action adjusted charts with details helps traders / investors to learn about previous corporate actions by companies’ managements. It also helps get the correct information about stocks and understand stock movements in the right context. Here’s how the charts look like after this update:
Types of Corporate Actions on Charts:
1.Dividends – We have incorporated the dividends declared by all companies on NSE on the charts and have denoted the corporate action as ‘D’. Upon hovering over the icon, you will get the exact details of the date and amount of dividend declared per share. The dividend amount is “not added” to the stock price as dividends are paid directly as cash to the shareholders. Since our charts are corporate action adjusted, historical actions such as splits, bonuses and rights issues can reduce the stock price in proportion to the ratio of the corporate action. For example, Yes Bank did a split at 10:2 on 21st September 2017. Before the split, the price was Rs. 1880 per share (Previous Closing Price * 5 considering it was a 10:2 split). The previous dividend was paid on 29th May 2017 at Rs. 12 per share. To calculate the dividend yield as on the date of dividend payment, one must re-calculate historical stock prices before the corporate action adjustment. In this case it is 0.8%. It is computed as Dividend / (Original Price of the stock at the time before future corporate actions) * 100. Computation = [12 / (298.7 * 5) * 100]. We have used this example to help you understand the context of the dividends with regards to historical data which has been adjusted if there were any splits etc.
2. Splits – Splits are usually done when the managements of companies feel that the price of their stock has risen too high and that it can have a psychological impact on the shareholders. They feel that the price alone can change their perception about the future or their expectation of the future. They could also do it if they feel that the high price can affect the liquidity as it restricts the number of shares that speculators can afford to buy and sell. If the stock is reasonably priced, then it will retain interest from all types of traders. Stocks which have gone too high and have not split their shares, have seen a lack of interest from retail traders simply because the margin requirement to trade such stocks is too high and that it restricts their ability to manage their money efficiently. In a split, the company slices one share into many. In a 10:1 stock split means that one share has been split into 10. Hence, the price drops to 1/10th of the original price and the quantity is multiplied by 10. In theory, a stock split does not impact the stock in any way. In practice, it does.
3. Bonus Issues – Bonuses are similar to dividends in some ways. They are both a way of distributing income to shareholders. When a company declares dividends, it pays cash to shareholders, but when it issues bonus shares, it doesn’t. The shareholders get additional shares and it is more tax efficient than declaring dividends. Basically bonus shares are created from a portion of the reserves (Shareholders’ equity). Theoretically, the stock price should reduce after a bonus issue as it proportionally reduces the reserves of the company. The shareholders can sell the bonus shares whenever they like if they want to encash the income. However, it has an inherent advantage over dividends. Basically, dividends are cash payouts! It cannot appreciate. However, if bonus shares are held, it can appreciate and further help in creating wealth. In the context of corporate action adjustments on charts, it helps to learn when companies have issued bonus shares and the effect it has had on the stock price subsequently. In theory, since the supply of shares increase via bonus shares and proportionally reduces the reserves of the company and thus is bearish in the short-run. However, in practice it is different and depends on other prevailing factors too.
4. Rights Issues – Rights issues are a type of corporate action that allows existing shareholders to invest further into the company in proportion to their shareholding. It also gives promoters an opportunity to regain control of their company by not diluting their ownership. In fact, by the virtue of a rights issue, they get an opportunity to increase their total shareholding by buying up the shares which are unsubscribed by the existing shareholders. Rights issues are a convenient way of increasing their ownership in the company without attracting much attention or incurring much costs. Companies also opt for rights issues to keep the shareholding structure unchanged and keep away from activist investors, hostile acquisition attempts etc. Theoretically, rights issues have a bearish impact on stock prices for the following reasons:
- The supply of shares increase thereby reducing EPS in the immediate future.
- The offer price is discount to market which can encourage investors to sell the stock in the open market in the near future.
- The capital raised from the rights issue will have to be deployed and will take a long time to generate profits etc.
Points to note about Corporate Actions on Charts:
- All Corporate Actions are shown based on the ‘Ex-Date’
- The types of corporate actions are as mentioned above (Dividends, Splits, Bonuses, Rights).
- Corporate actions on charts are done for all charts with symbols marked on the particular dates.
- Pre-2010 corporate actions are not denoted on charts (However, the charts are adjusted for corporate action).
- If you don’t want the corporate actions displayed on the charts, you can disable it from the settings in the dashboard.
Retail traders in India are not given the proper information to trade / invest. We wanted to change this providing these features to help understand what corporate actions the listed companies are taking and the impact it has had on the stocks subsequently. I believe that this helps to trade more effectively. Also, if the charts are not adjusted for corporate actions, the analysis will be incorrect as the moving averages, indicators, drawings, chart patterns etc. will get adversely affected. Corporate actions can impact stock prices to a very large extent and thus it is important to know what has happened in the past. We hope you enjoy this update and if you have any questions or clarifications, feel free to get in touch with us in the comments section below.
Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.