Understanding on Bonus Issue Vs Right Issue

By Stella Goh – Market Data Analyst | 28 November 2018

By investing in the stock market, the investors are becoming a shareholder of a particular company through buying the specific stock. As a shareholder, investors will be updated from time to time about the company’s new direction including announcements of “Bonus Issue” and “Right shares Issue”. Both seem alike, but there are a different so all shareholders should understand what differentiates between Bonus Issue and Right Issue and react accordingly.

Bonus Issue

Bonus Issue defined as free new shares issued to the existing shareholders based on the specified proportion of shares they are holdings which will be at free of cost. Bonus Shares is a conversion of the company’s accumulated earnings which are not given out in the form of dividends but converted into free shares.

When the bonus share distribution happens, it will increase the total number of shares owned by the firm. The Bonus shares do not inject fresh working capital into the company, as there are to distribute among the shareholders without any conditions. The net worth of the company will remain the same. Usually, bonus shares will pay up in full, and the shareholders are also allowed to sell those bonus shares to make a quick profit or save it for future gain.

Let us look at the example of bonus issue. If the company declares 3:2 of bonus issues, it means that every 2 shares held by shareholders, 3 Bonus share will be allotted to them. A shareholder with 1,000 shares will be received 1,500 bonus shares which calculated as (1000 x 3/2 = 1500).

Why Issue Bonus Shares?

The purpose of the company issue bonus shares is to increase the active trading by increasing the number of outstanding shares in the market through a reduction in market price per share to a reasonable range.

The companies can increase their stock liquidity and promote more active trading of the shares. It also incentivizes the new investors to purchase the company shares that are performing well within an attractive price range. It will also help the company to avoid the outflows of cash in the form of dividends.

Right Issue

Right share is for the existing shareholders who have the privilege but not obligation to purchase the specified number of shares directly from the company based on the proportion of existing holdings at a discounted price within the specified period. The rights are transferable. Therefore, the shareholders can decide on himself whether or not to buy or even sell off his rights in the open market to other investors by wholly or partially.

The right shares issued to the shareholders have values that used to compensate the current shareholders for future dilution of their existing share’s value. Dilution will occur when a rights offering spreads a company’s net profit over a more extensive number of shares. Thus, the company’s earnings per share (EPS) will decreases as the allocated earnings result in share dilution.

Let us look at the example of the right issue. If the company give out a 1:4 right issue means that an existing investor can purchase 1 extra share for every 4 shares which already held by him. The issued price usually will be lower than the prevailing market price of the stock, which means that the share is to offer at a discount to the current market price.

Why Issue Right Shares?

A Right Issues is carried out by a company to raise additional capital. Companies will use the cash to acquired assets, takeover, corporate expansion or repays their debts. However, the company also can raise money by other ways, such as obtain a loan from a bank. There will be times when the banks are reluctant to lend, the rights issue will be an option. Besides, there will be a high interest incurred by the loans, which may force the company to raise the capital through the right issue of offerings to clear the credit. Therefore, investors need to make investment decision whether or not they want to take up the right issue.

Bonus Issue Vs Right Issue

Basis Comparison Bonus Shares Right Shares
Meaning Shares issued in the proportion of their existing holdings Issued to existing shareholders at a discounted price within a specified period
Price Issued at free of cost Issued at a discounted price
Objective Issued as an alternative to the dividend payment. Also used to bring the market price per share, within the lower price range Raise fresh capital from the market
Paid Up Value Always fully paid up Either fully or partially paid up
Share Price Shares dilution will bring down the share price in a short period and investors most of the time will not gain nor lose anything. Shares price may plunge due to shareholders will sell the rights to the open market which in discounted price. It also sends the signal to the market that the company may be in trouble so need to find new capital.
Minimum Subscription Not Required Mandatory

Conclusion

Both Right Shares and Bonus Shares have few similarities which offered to the existing shareholders as a tactic that company use to increase the number of their shares in the market.

Artificial Intelligent versus Algo Trading

By Jeff Kum | 21 November 2018

Recently I had attended few seminars promoting investment strategy using artificial intelligence. Due to curiosity, I have done some research about Algo trading vs AI and would like to share it here. For readers info, I’m not a computer genius nor super trader so the reader can give feedback or correct me if I am wrong in whatever info provided here.

Algo Trading

This method of trading is referred to as a method of preset action of execution by a trader or a computer repeatedly over a period set. It starts with a set of rules and condition, which developed by experienced traders where it will be tested first in simulation to gauge the effectiveness of the program to make a profit in the market.

The experiment can be started as simple as below:

  • Buy when the stock price is close above 50 moving average
  • Sell when the stock price is close below 50 moving average

This simple instruction can code into a computer program using the past data movement of the stock price and put in the test simulation that we called as ‘backtest’. The test shall generate more than 100 trade or even 10,000 trades provided the stock price data history is long enough from the past to the present. With the generated test simulation, the traders will know how much profit/lost, risk/reward ratio, recovery factor and much other info that generate using this trading method in the past. The trader will assume that the program will create a similar performance in future and will use it to trade in real account if it is profitable and within the comfortable risk.

Artificial Intelligent

So far until now, I haven’t seen anyone using artificial intelligence to trade. Yes, I know some of the investment gurus, investment fund house or brokers claim that they already use it to trade the market, but I had a doubt on that. Let’s understand what A.I. is and how it works.

The AI starts with a programming system which mimics the human intellectual and they called it ‘neural network’. By the layman terms, everything starts with few points and the computer will start the first step to learn to identify ‘correct’ and ‘not correct’.

Example like a human child, if you want to teach an AI to learn how to differentiate a cat picture with rest of the image, show it a set few random pictures then you select the one with the cat to tell the computer that is a cat. The process can run many times until the machine can identify more accurately which image has a cat in it. The learning process can be unlimited hence the more complex the situation, the more it needs the support of super fast multi servers to store and to run it. That is how an AI learn, from experience.

The Different between AI & Algo Trading

 

Artificial Intelligent Algo Trading
It will set own rules and conditions based on learning experience. Rules and conditions need to set by a human
Rules and conditions will change by the machine based on objective Human will need to change the rules and requirement from time to time, to tune it to current market behaviour
Outcome shall be better in future due to the machine will learn and correct itself each time. The result is often predictable and similar to past. But it will change when market behaviour change.

 

Conclusion

To trade market using artificial intelligence, I think it will need some massive tech company and funding to support it like Goldman Sachs already start the AI project.

You will need an AI that can learn from multi and diverse info like what US President will speak about, when he will be talking, How his tone will impact the market, when is the storm coming and how it will change the market, etc..etc.. The cost will be huge; it will be like combining many AI into one super AI to trade the market successfully.

ShareInvestor Station & Webpro New Function

In conjunction with Invest fair Singapore 2018, ShareInvestor had added two new awesome features into ShareInvestor Station and Webpro to enhance the available functions to the subscribers further. The best thing is new and old subscribers does not net to pay any extra to get this additional value!

1. Intrinsic Value Analysis

Intrinsic value refers to the value of a stock determined through fundamental analysis including tangible and intangible factors, without reference to its market value and it’s the concept always been champion by value investors around the world.
There are three valuation models currently available in Shareinvestor Station & Webpro:

a. Discounted Earnings Model
b. Discounted Cashflow Model
c. Gordon Growth Model

Few useful sub-functions also included like the comparison of local and global companies in the same industry (peer analysis) and the addition of another important metric: Piotroski F score to highlight fundamentally strong companies.
Piotroski F Score is a score between 0-9 which reflects the financial strength of a company in term of its fundamental value, based on 9 accounting-based parameters. The parameters are related to the company’s profitability, leverage, liquidity & source of funds and operating efficiency.

i) Profitability: Measures the company’s profitability and ability to generate positive earnings or cash flows.

ii) Leverage, Liquidity and Source of Funds: Measures the changes in capital structure and the company’s ability to meet its debt service obligations.

iii) Operating Efficiency: Measures the efficiency of the company’s operations and the uses of its assets.
Companies with a high score of 8-9, considered fundamentally good whereas companies with a low score of 0-2 are considered weak.

2. Share Ownership

If you are planning to own shares of the company in the stock market, you may want to know who is the major shareholders in that company. A good company usually will be invested by big fund houses like KWSP, Khazanah or even international Fund like Vanguard, Berkshire Hattaway and Fidelity Fund.

Now with this new functions will enable you to access the info who is the top shareholders for each company and analyse their ownership details across the world.

If you wish to know more about ShareInvestor Station and Webpro, do contact us via email accounts.my@shareinvestor.com or call during office hour 9.00am to 6.00pm.

Stock Market: Growth Yield versus Dividend Yield

By Jeff Kum | 7 November 2018

Long-term investors always look at passive returns for their investment asset and most will opt for a fixed deposit to gain interest rates. But why most of the fund managers across the world invest in the stock market instead?

To answer the question above, we need to explore why a stock market is an attraction for them to invest. Most of the public listed company lead by a CEO (Chief Executive Officer) where his performance is driven by giving a good investment return to his bosses, which is the chairman and the shareholders. By doing that, most of the company will provide a dividend return rates that better than FD rates or will buy back shares from time to time to elevate the stock price to make it worth to hold the shares for future gain or do both.

Growth Yield Company

A company that focuses on growth yield usually will buyback company shares using profit generated from the company business or other investment profit/dividend gain. This practice will limit the shares quantity traded in the market, hence reduce the volatility and make it worth to hold by creating a scarcity of the stock.

Some growth company will give out dividend but most of the time will be lower than fixed deposit rates. The reason is the company will need the cash to be invested back into the company by expanding the business or increase the investment asset holding like property, other company stock etc. By doing this exercise, it will improve the company value, hence attracting long-term investors.

Most stock price in growth yield company will be in a long-term uptrend and tend to be more resilient to the short-term market volatility. The stock price also tends to be much more expensive compared with the dividend yield company. In the longer term, the growth yield company mostly will surpass dividend yield company regarding yield returns. Example, the company A stock price that worth RM10 only give dividend 1% yield and if you buy now will get RM0.1 dividend year later. But after ten years, when the stock price increase to RM100, 1% dividend equal to RM1 which mean your dividend returns from your initial RM10 had increased from 1% to 10%!

Dividend Yield Company

Dividend yield company almost an opposite from growth yield company, where most of it tends to have limited cash for investment growth in future, stock price either in sideways or downtrend and they always give dividend higher than fixed deposit rates and more succumbed to short-term market volatility.

Investors who invest in dividend yield company will hold the company stock in a shorter-term timeframe. This type of company normally will need to be able to generate consistent cash flow like the gaming industry. Future revenue and profitability will be less important here as compared to the growth yield company.

Some companies had exceptional where there are more resilient to the stock market price volatility, especially REITs holding. REIT income generated by rental yield from the property and property price tend to rise in future, which brings up the REIT value, hence tend to trend higher but at a slower pace.

Conclusion

While further study and more in-depth analysis needed to find a good shares company to invest for long-term, above guideline can serve as basic knowledge for a start. The investor is advised to understand his/her investment timeframe as well as the desired profit target in the foreseeable future.