What is the Difference Between Bonus Issue and Stock Split?

What is the Difference Between Bonus Issue and Stock Split?

The primary difference between a bonus issue and a stock split is that a Bonus Issue gives extra shares to existing shareholders at no cost, while a Stock Split divides existing shares into multiple units. Companies list these two terms publicly to boost their traded share numbers. Several things are similar between bonus and stock split. Thus, they are easily confused. However, there is a difference between bonus issue and stock split. When it comes to rewarding shareholders, companies choose different methods. It could be in the form of additional shares or a dividend. Here's where Bonus shares and stock splits come in. Although Bonus shares and stock splits have different objectives, this post explains the meaning of each term, along with their advantages and disadvantages and the difference between bonus issue and stock split.
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  • 07 Oct 2023
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Key Highlights of this Article

  • When companies give additional shares to their shareholders without asking for any payment, it's called a bonus issue or equity dividend. Stock splits happen when a company divides one existing share into multiple shares.
  • In a 4:1 bonus issue, shareholders get four extra shares for every one they already have. So, if you have ten shares, you'll end up with a total of 40 shares (4*10).
  • In a 1:2 stock split, each share turns into two shares, and if you had 100 shares before, you'll now have 200 shares.
  • The key difference between bonus issue and stock splits is how they increase shares number and decrease market value.

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:

  • Bonus shares are not taxed when investors receive them.
  • It is advantageous for long-term shareholders who wish to increase their investment.
  • With the additional cash, the company can expand its business, which strengthens investor confidence.
  • As a result of holding bonus shares, investors will receive higher dividends when the company declares dividends in the future.
  • The company's commitment to long-term growth is reflected in bonus shares, which send positive signals to the market.

Here are the downsides of Bonus Shares:

  • Stock prices are more volatile when there's market speculation or market sentiment changes.
  • Bonus shares require a much larger capital allocation from the company's cash reserves compared to dividend distributions.
  • In spite of the increase in shares, the company's profit remains unchanged, resulting in a proportional decrease in earnings per share (EPS).

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:

  • Through stock splits, the number of outstanding shares substantially increases while the market capitalization remains the same.
  • By splitting the shares, investors can afford to buy them at a lower price.
  • A split improves accessibility for investors by increasing the number of shares available for purchase and sale.
  • When share prices are low, and share numbers are high, diversifying and rebalancing a portfolio becomes easier.
  • Instead of issuing new shares, companies can split stock to increase share numbers, preventing stock dilution.

Some of the disadvantages of stock split are as follows:

  • Regulations and legal requirements must be met in order to carry out the stock split, which involves significant costs.
  • A stock split does not affect a company's underlying position and, therefore, adds no value.
  • Stock splits increase accessibility, attracting a larger pool of investors, which may boost the volatility of the stock.

As we have discussed bonus shares and stock split, let’s understand the difference between bonus issue and stock split now:

Basis Bonus Issue Stock Split
MeaningA bonus issue is a free distribution of extra shares to shareholders.A stock split divides a company's outstanding shares into multiple shares.
Face ValueNo changeReduces in the same ratio
Company RationaleIt is an alternative to paying dividends and giving away accumulated reserves.Increase share liquidity, reduce share price, and make it more affordable.
ExampleA 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.

Conclusion

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.

FAQs on Bonus vs. Stock Split

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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