Stock Split v/s Bonus Issue: Know the Difference

What are Bonus Shares?

When businesses distribute more shares to their owners without receiving any payment (remuneration), this is known as a bonus issue or equity dividend. Shareholders receive these bonus shares at no further cost depending on their ownership percentage in the firm. Shares of the bonus are disclosed in a specific ratio.

Imagine a corporation alerting you to a 1:2 bonus problem. You can get one additional share of the firm for every two shares you own. Your investment's worth remains the same, though.

Companies use their free reserves from actual earnings to give bonuses. Companies cannot issue bonus securities if they fall behind on principal and interest payments.

Why Do Companies Issue Bonus Shares?

Companies issue bonus shares mainly to reward existing shareholders while keeping their cash reserves intact. Instead of paying out a cash dividend, they convert a portion of their accumulated profits into share capital and distribute extra shares. This lets them recognise shareholder loyalty without affecting liquidity.

A bonus issue is also a way for a company to signal strong financial health. It shows that the business has built up healthy reserves and feels confident about its future performance. In many cases, it also helps improve market liquidity, as a higher number of shares in circulation can encourage more active trading.

You’ll also often see bonus issues when a company wants to make its shares more affordable. Although the total value of your holding remains unchanged, the reduced share price can attract new investors and widen participation. Overall, bonus shares are a mix of strategic finance management and investor-friendly signalling.

Pros and Cons of a Bonus Issue

Discussed in detail below are the main pros and cons of a bonus issue:

Pros:

• Investors are not required to pay taxes when they receive bonus shares. 
• Long-term shareholders who aim to increase their investment find it advantageous. 
• Bonus shares strengthen investor confidence in the company's operations as the company utilises the cash for business expansion. 
• By holding a greater number of shares through bonus shares, investors will receive higher dividends when the firm declares dividends in the future. 
• Bonus shares send positive signals to the market, indicating the company's commitment to long-term growth.

Cons:

• Market speculation and market sentiment changes contribute to increased stock price volatility. 
• Issuing the bonus shares necessitates a larger capital allocation from the company's cash reserves instead of distributing dividends. 
• Despite the increase in the share numbers, the company's profit remains unchanged, resulting in a proportional decrease in earnings per share (EPS). 

What Is Stock Split?

When a firm divides an existing share into many shares, this is known as the stock split. In other words, a stock split might result in dividing a single share of a specific company's stock in your portfolio into two, three, or even more shares.

When share prices get too high, publicly listed corporations may decide to divide their stocks. This action lowers the unit cost of each stock. The liquidity of a company's shares, or how frequently the shares are traded on a stock market, can be increased by stock splits. The total share numbers exchanged over a particular period is known as volume. 

Pros And Cons of a Stock Split

The pros and cons of a stock split are:

Pros:

• The total outstanding shares substantially increase through stock splits while the company's market capitalisation remains unchanged. 
• The stock split reduces the share price proportionally, making it more affordable for investors. 
• Splitting a stock enhances accessibility by increasing the available share numbers, facilitating ease of acquisition and sale for investors. 
• Diversifying and rebalancing a portfolio becomes easier with high share numbers and low share prices. 
• Companies can augment the share numbers by implementing stock splits rather than issuing new shares, thereby preventing stock dilution.

Cons:

• The stock split involves significant costs and must be carried out by legal regulations and regulatory requirements. 
• The stock split doesn't impact a company's underlying position and therefore does not contribute any value. 
• The adjusted share price resulting from a stock split increases accessibility, potentially attracting a larger pool of investors, which may elevate the stock's volatility.

Bonus Issue vs Stock Split

Here’s the difference between bonus share vs stock split:

Bonus Issue and Stock Split: What Is Its Impact on Share Price

Bonus Issue: 

During the bonus issue, the share price is directly impacted by the share numbers issued. For instance, if a company declares a 5:1 bonus issue, let's examine the scenario:

Before the Bonus Issue:

●    The share price is 500
●    The total share numbers held is 100

After the Bonus Issue:

●    The share price after the bonus issue is 100 (500/5)
●    An additional number of shares allotted is 500
●    After a bonus issue, the Total share numbers held is 600 (500 additional + 100 existing shares)

It is important to note that its face value remains unchanged following the bonus issue.

Stock Split

Between stock split vs bonus share, in the stock split, the share price is influenced by the share numbers issued. Let's consider a scenario where a company declares a stock split of 1:3. It implies that each share will be classified into three shares:

Before the Stock Split:

●    The share price is 500
●    The total share numbers held is 100
●    Face value of each share: 20

After Stock Split:

●    After the stock split. The Share price is 166.66 (500/3)
●    Total share numbers held after the stock split is 300
●    Each share's face value after the stock split is 6.66

It's important to highlight that market capitalisation will stay the same before and after the stock split.

The method for calculating market capitalisation is as follows: 

[Share price] x [Total number of shares].
N X P = MC 
N: Number of outstanding shares
MC: Market Capitalization
P: Price of each share 

Suppose, a firm has a market capitalisation of Rs 1 lac and has ten thousand shares, each share will have a value of ten rupees. So, the shares will be divided in a ratio of 1:2. Accordingly, any shareholder who now owns one share will get two shares. In this instance, the share numbers rise to twenty thousand shares, while the price per share falls to five rupees. In this manner, market capitalisation will stay constant.  

Why Should You Care About Bonus Issues and Stock Splits?

Bonus issues and stock splits matter because they change how your investment looks and behaves in the market. You end up holding more shares after the action, but the overall value of your investment stays the same initially. What does change is how accessible the stock becomes.

• Lower share price: After a split or bonus issue, the price of each share typically drops, making it easier for new or smaller investors to enter.
• Better liquidity: More shares in circulation can lead to smoother buying and selling.

These corporate actions can also offer insight into management’s confidence. A company announcing such measures often aims to improve market participation or highlight its stability. For long-term investors, having more shares can become beneficial later if the company grows, pays dividends, or attracts stronger market attention.

Conclusion

The Bonus share vs stock split increase the number of shares and decrease their market value, but only the stock split affects their face value. The main distinction between a Bonus share and stock split is this. Bonus shares show that the business has produced additional reserves that it can add to the share capital. A stock split is a strategy to make pricey shares accessible to a wider shareholder base.