Difference Between Stock Split and Bonus Issue 

In the stock investing world corporations take strategic decisions like stock splits and bonus issues to reward existing shareholders. The two ways seem similar, and they have the power to increase the number of shares in circulation. They both have distinct mechanics, purposes, and implications. Are you ready to explore it? 

This blog will help you to understand the difference between stock splits and bonus issues, how they work, advantages and disadvantages, and the impact on share prices. Whether you are a new investor or seasoned investor, it is necessary to get knowledge about bonus issues vs stock split.

What is Stock Split?

A stock split is considered a corporate action where a company divides their existing shares into multiple shares to improve liquidity. Unlike bonus shares, a stock split doesn’t require capital reserves; it simply changes the face value and number of existing shares.  

For example, 

In a 2-for-1 stock split, each shareholder receives two shares for every one held. So, if you held 100 shares at ₹100 each, post-split, you would hold 200 shares at ₹50 each. The total investment value remains the same.

What is Bonus Share?

Bonus shares are the additional shares that are issued by a company to their existing shareholders without any additional cost. For instance, if a company announces a 1:1 bonus issue, it means their shareholders will receive one additional share for every share they hold.  

Why do companies issue bonus shares? Bonus issues are announced when the company has accumulated substantial reserves and wants to reward its shareholders without impacting cash flows. It will improve stock liquidity and also make shares affordable to retail investors.  

Pros And Cons of a Stock Split

Pros	Cons
Lower per-share price will make the stock more accessible to retail investors	No change in company’s market capitalization
The increased number of shares offer higher trading volumes	Increased liquidity may result in short-term volatility
The lower share price will attract more attention of investors	Involve costs related to record-keeping and share reconstructing
It’s a positive signal that suggesting the company experiencing growth	It attracts peculative traders who are focusing on short=term price movements, that will make volatility

Pros and Cons of a Bonus Issue

Pros	Cons
It’s a sign of the company’s financial health, so they reward their shareholders through a bonus issue	Investors don’t receive actual cash, they can only get additional shares
The shares in the market can enhance its trading volumes	The number of shares increases the EPS (Earnings Per Share) will decline
It signals company stability and that enhance investor confidence in future earnings	The additional share distribution will impact the company’s financial performance
Bonus shares do not lead to tax liabilities like cash dividends	Sometimes it attracts short=term traders, which lead to volatility and misalignment with long-term value creation.

Stock Split vs Bonus Issue  

Feature	Stock Split	Bonus Issue
Purpose	To increase liquidity of shares	To reward shareholders
Market Perception	More accessible to small investors	Positive sign of the company health
Impact of EPS (Earnings Per Share)	Shares are divided into multiple shares, but no change occurs in the company’s earnings	The number of outstanding shares increases, but net profit remains unchanged
Investor Benefit	More affordable share price	Free additional shares
Example	A company stock is trading at ₹1,000 per share, and it announces a 2-for-1 stock split. This means every shareholder will receive two shares for each one they currently own. After the split, the stock price will drop to ₹500, but shareholders will now own twice the number of shares.   So, if you had 10 shares worth ₹10,000 before, you’ll have 20 shares worth ₹10,000 after – the total value remains the same.	You own 100 shares of a company, and they announce a 1:1 bonus issue. This means for every 1 share you hold; you’ll receive 1 additional share.   So, you’ll get 100 extra shares, taking your total to 200 shares. If the share price was ₹200 before the bonus, it will adjust to ₹100 after the issue – keeping the total value of your investment the same at ₹20,000.

Bonus Issue and Stock Split: What is its Impact on Share Price?

From a financial standpoint, both a bonus issue and a stock split adjust the share price downward in proportion to the increase in shares. 

For example; 

ABC company’s stock is prices at ₹1000. 

🠖 If they declare a 1:1 Bonus Issue, the share price is expected to adjust to ₹500, and the number of shares will double. 

🠖 If they announce a 2-for-1 Stock Split, again, the price will adjust to ₹500 with twice the number of shares.  

In simple words, market capitalization remains unchanged in both cases. This action will improve market sentiment and liquidity. While both result in increased share count, bonus shares vs stock split differs in origin and intent. Bonus issues come from a company’s saved-up profits and give extra shares to shareholders. Stock splits, on the other hand, simply divide existing shares to make the share price lower, without using any company profits. 

Conclusion

Understanding the difference between bonus issues and stock splits is important for stock investors. Both aim to reward their shareholders and boost liquidity, but their structure and process may vary. In the short term, both can attract new investors and improve market sentiment, but savvy investors should focus more on a company’s fundamentals rather than these cosmetic changes alone.  

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