Difference between bonus share and stock split

Bonus share issues and stock splits are two popular corporate actions performed by publicly listed companies to increase the number of shares on the market. Both terms are often misunderstood by investors. Publicly traded companies reward their shareholders in a number of ways. One of these ways is by paying dividends or by issuing additional shares. You should be aware that shareholders are not required to pay any additional fees in the event of a stock split or bonus issue.

What is a bonus share?

Bonus shares are additional shares that are issued to present shareholders at no extra cost based on the number of shares that a shareholder holds. These are the company’s accumulated earnings that are turned into free shares rather than dividends.

The underlying idea behind bonus shares is that the total number of shares rises at a fixed ratio of shares held to shares outstanding. Bonus shares are issued by companies to encourage retail involvement and to enhance their stock base.

 When a firm’s share price is high, it becomes harder for new investors to purchase shares of that company. The price per share decreases as the number of shares increases. However, even if bonus shares are declared, the total capital stays the same.

Pros and Cons of a Bonus Share Issue:

Pros:

  • The stock’s price falls as a result of bonus concerns. However, when the stock’s market reach expands, this might be advantageous. If a stock is priced at Rs.700, the price will fall following a bonus issue, making it simpler for those with less cash to purchase larger amounts of these shares.
  • Bonus share offerings are simply profit capitalization. This action always improves a company’s creditworthiness. Making the firm more appealing to investors in general.
  • As a shareholder, you receive more shares, which translates into more potential dividend payments in the future.

Cons:

  • Speculation and general market mood shifts, resulting in increased volatility in stock prices.
  • The issuance of bonus shares is a time-consuming operation that needs several regulatory clearances from various agencies.

What is a Stock Split?

When the number of shares is multiplied, this is referred to as a stock split. The number of shares held has been ‘split.’ Technically, the corporation is not issuing additional shares. The number of existing shares is being divided or split. Assume a corporation announces a stock split in the ratio of 1:2. It means that for every one share owned, there will be two shares, and for every hundred shares held, there will be 200 shares.

Pros and Cons of a Stock Split:

Pros:

The primary benefit of a split is that it lowers the price of a share, making it more accessible for investors.

The number of shares exchanged rises, broadening the ownership base.

Cons:

  • Increases market speculative activity. This causes the stock’s price to be more volatile.
  • Stock splits are a costly and time-consuming operation. The laws and regulatory permissions necessary are massive.

Difference between Bonus Share and Stock Split

A bonus share issue occurs when present shareholders receive an extra share, whereas a stock split occurs when the same share is divided into two or more shares based on the split ratio. Bonus shares reward current owners, and stock splits benefit both existing shareholders and new investors. The bonus and stock split will have no effect on the company’s fundamentals; the issued share capital, revenue, and profit will all stay intact.

Bonus Shares are only available to current shareholders. Existing shareholders, as well as prospective investors, will profit from the stock split. If the firm decides to split its stock from a face value of ten to a face value of five, the number of stocks doubles and the price changes; nevertheless, the face value of bonus stocks remains fixed, but the price is modified in proportion to the bonus ratio.

Are bonus shares a good sign for a potential investor?

Yes, the issuance of a bonus share is a favourable indicator for the investor since it demonstrates the company’s healthy health. As a result of the bonus shares, the share price falls and the number of shares increases, but the company’s worth remains the same.

Final words

Bonus issues and stock splits are business activities designed to keep share values from skyrocketing. Despite a growth in the number of outstanding shares and a decrease in the price per share, the market capitalization (and hence the value of the firm) remains constant. Bonus issues and stock splits make shares more accessible to small investors while also increasing marketability and liquidity.

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