How share prices fall after the bonus issue.

Bonus Issues, a Near-Term Top...

Bonus: The word itself sounds fancy. Be it at a shopping mall or online portals. We humans love to get bonuses or free stuffs. Stock markets are no exception. Retails investors get fascinated by the word 'Bonus'. The moment they hear a bonus announcement of a company, they rush to buy its shares. You have often seen a share price roaring just because a bonus issue has been announced.
But is the greed for these kind of freebies good for retail investors?

ONGC Reaction to Bonus Issue

Just have a look at the chart of Oil and Natural Gas Corporation. It announced a bonus issue on 24 October 2016 when it was trading at 185. Post the announcement it rallied and hit a high of Rs 208 in just one and half months, up more than 12%. The sentiment drove the price up.
But as soon as it came out with a bonus issue on 15 December 2016, the downfall started. It's been more than three-months now and the stock is trading 10% below its ex-bonus price.
A company issuing a bonus share is said to be cash rich. Then why do you think the price fell after the bonus issue?
The reason can be simple. Bonus shares are additional shares that are flooded into the market by a company. This increases the supply of shares and as a result the prices fall.
Also certain speculators invest in them for bonus gains. Once the bonus story is over, these speculators start dumping their shares and as a result the prices tumble.
Whatever the reason may be, the price fell after the bonus was issued.
Bonus issue might not be the only reason driving the stock prices down. There are of course various other factors affecting a stock price at a time. But this kind of price decline was observed not only in the case of ONGC.

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