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Whenever businesses distribute additional shares to their owners without receiving any remuneration (payment), this is known as a bonus issue or equity dividend. Bonus shares are distributed to shareholders based on their ownership percentage in the company. A specific ratio is used to disclose bonus shares.
For example, a corporation alerts you to a 1:2 bonus. For every two shares you own, you get an additional share. However, your investment remains the same. Bonuses are paid from free reserves from actual earnings. A company cannot issue bonus securities if it is behind on principal and interest payments.
Bonus Shares have the following advantages:
Here are the downsides of Bonus Shares:
Stock splits occur when a firm divides an existing share into many shares. Basically, a stock split divides a single share in your portfolio into two, three, or more shares of that company's stock.
Publicly traded corporations may decide to divide their shares if share prices rise too high. By doing so, each stock's unit cost is reduced. By splitting shares, a company can increase the liquidity of its shares or the frequency of its trading. During a given period, volume refers to the total number of shares traded.
The following are the stock split advantages:
Some of the disadvantages of stock split are as follows:
As we have discussed bonus shares and stock split, let’s understand the difference between bonus issue and stock split now:
A bonus issue is a free distribution of extra shares to shareholders.
A stock split divides a company's outstanding shares into multiple shares.
Reduces in the same ratio
It is an alternative to paying dividends and giving away accumulated reserves.
Increase share liquidity, reduce share price, and make it more affordable.
A 4:1 bonus issue involves shareholders receiving four shares free for every one they hold. As a result, ten shares will give you 40 (4*10) shares in total.
During a stock split in the 1:2 ratio, each share will become two shares, and every 100 shares will become 200 shares.
|Basis||Bonus Issue||Stock Split|
|Meaning||A bonus issue is a free distribution of extra shares to shareholders.||A stock split divides a company's outstanding shares into multiple shares.|
|Face Value||No change||Reduces in the same ratio|
|Company Rationale||It is an alternative to paying dividends and giving away accumulated reserves.||Increase share liquidity, reduce share price, and make it more affordable.|
|Example||A 4:1 bonus issue involves shareholders receiving four shares free for every one they hold. As a result, ten shares will give you 40 (4*10) shares in total.||During a stock split in the 1:2 ratio, each share will become two shares, and every 100 shares will become 200 shares.|
The key difference between bonus issue and stock splits is how they increase the number of shares and decrease their market value. Only a stock split affects the face value of shares. Bonus shares indicate that the company has generated extra reserves that it can include in the share capital. On the other hand, a stock split is a method to make expensive shares available to a broader group of shareholders. You can seek help from Kotak Securities to ease the complex world of trading, they provide valuable tools and resources for trading.
When it comes to choosing between bonus shares and a stock split, both options involve making slight adjustments to your capital structure. With bonus shares, the company issues new shares to its current shareholders using the profits from its free reserves. In the case of a stock split, only the par value (the nominal value) of the stock decreases proportionally.
Bonus shares are issued by a company to increase liquidity and investor participation. Secondly, the stock price drops to a reasonable range following a bonus issue, making it more affordable for investors to purchase additional shares.
It doesn't matter whether you buy in after or before a split or bonus if you have done your research and are confident the company will create long-term wealth.
A stock split can make the shares appear less expensive, even though the company's fundamental value remains the same. It can also enhance the ease of buying and selling the stock. When a stock undergoes a split, it can sometimes lead to an increase in the stock's price, even though there might be a temporary drop right after the split occurs.
Stock splits are only available to investors who own shares of a company in their Demat account on the record date.
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