People often get confused between bonus shares and stock splits. They do have some similarities but technically they are different.
Without any ado, let’s have a quick comparison, then we’ll discuss both in detail.
Bonus Shares Vs Stock Split – Quick Details
Bonus shares are extra shares issued to shareholders in a certain proportion to provide them rewards over existing shares.
For example, if a company declares a bonus share in a ratio of 2:1 that means the shareholder will get 2 shares for every single share he holds. If you have 10 shares of that company, you will now get 20 shares of the same company to have a total of 30 shares that will increase your profit margin.
While a stock split is dividing a stock into multiple shares to decrease the price of a share to make it more affordable to the investors. Unlike bonus shares, you don’t get any additional shares.
For example, if a company announces a stock split in the 1:2 ratio that means its every 1 share, will become 2 shares. Now if you hold 100 shares of the same company, your share count will become 200 shares but the price of the share will remain the same.
The actual value of a single share is decreased to 50% making it more affordable now.
|A bonus issue is the extra shares a company gives to shareholders for free.
|Stock Split dissects the existing shares of the company into multiple shares.
|In a 3:1 bonus issue,
The shareholders will get 3 shares free for every one share held.
So for 10 shares, will get 30 shares (3*10) to have a total of 40 shares (10+30)
|In a stock split in the 1:2 ratio,
Every 1 share of the company held, will become 2 shares.
Then 100 shares held, will become 200 shares.
|No change in face value
|Face value decreases in the same ratio
|An alternative to dividends to offer income to the shareholder
|Reduces share price, and makes it affordable for more shareholders.
|Give away from the accumulated cash reserve
|Downfall in share price could be loss-making for shareholders in unfavorable market conditions
|Cash reserve depletes
|No affect on cash reserves
Let’s dig deep inside of both bonus shares and stock split.
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What is Bonus Share
A bonus issue is the extra equity share each existing shareholder receives in a certain ratio. A company distributes more shares as an alternative to the dividend payout.
Shareholders enjoy the extra income from bonus shares as they get an extra number of shares without paying extra money. Shareholders can sell bonus shares to encash the profit.
Most companies issue bonus shares when they are tight on cash and are not able to pay dividends. So they pay bonus shares as an alternative to dividends as a method of providing income to shareholders.
Let’s have a look at the list of companies issuing bonus shares in the upcoming days –
For example, Redington has announced a 1:1 bonus issue which will happen in the upcoming days. The company will give 1 share for every one share the shareholders hold. Now if you possess 30 shares of Redington, you will receive 30 bonus shares (30×1) and you will have 60 shares in total.
But Dhanuseri Tea is offering 1:2 which means the company will give 1 share for every 2 shares, now if you possess 10 Dhaunseri Tea shares, you will get 5 bonus shares (10 x ½) to have a total of 15 shares.
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Advantages of Bonus Share
- Shareholders get extra shares for free
- Extra income to shareholders if they encash the bonus shares
- Increases the issued share capital of the company
Disadvantages of Bonus Share
- Reduces cash reserve of company
- May affect future dividend payouts
- Selling bonus shares may attract capital gains tax
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What is Stock Split
A company when increases the number of shares without affecting its share price is called a stock split. The company doesn’t issue new shares, only the existing number of shares is split into a fixed ratio.
For example, if a company announces a stock split in the 1:2 ratio that means each share you hold, will become 2 shares, now if you hold a total of 50 shares, your total share count will become 100 shares.
Stock split reduces share price and makes it affordable for the investors. It also increases the liquidity because more investors get attracted towards a reduced price.
An increase in outstanding shares also decreases the overall share value of the stock that makes it cheaper for the investors.
Advantages of Stock Split
- Reduces the share price
- The stock becomes affordable to investors
- Increases liquidity
Disadvantages of Stock Split
- Share price fall could be loss-making if the market is volatile
Bonus issue and stock split both are useful in increasing the number of shares and bring down the market value.
But the key difference between bonus share and the stock split is that the stock split has an impact on the stock’s face value.
Bonus issues depict that the company has generated extra reserves that it can transfer to its share capital.
Whereas, the stock split is an initiative to make costly shares affordable to attract more investors. I hope you have now understood the difference between both terms in an easy manner.