Difference Between Bonus Issue and Stock Split

A bonus issue, also referred to as a bonus share, occurs when a company issues additional shares to its existing shareholders at no cost. The number of bonus shares issued is usually determined based on the number of shares a shareholder already holds. Companies typically resort to a bonus issue when they have surplus reserves but do not wish to pay cash dividends. This allows them to reward their shareholders by increasing the number of shares they hold, although the overall value of their investment does not change.

For example, if a company issues a bonus of 1:5, a shareholder holding 5 shares would receive 1 additional share for free, thus increasing their total shareholding without affecting the overall market value of the company.

A stock split occurs when a company divides its existing shares into multiple shares. This increases the number of outstanding shares, but reduces the price per share accordingly, so that the total value of the investor’s holdings remains unchanged. Companies typically undertake stock splits when their share prices become too high, making them less accessible to retail investors. The purpose of a stock split is to make shares more affordable and encourage greater market participation.

For example, in a 2-for-1 stock split, shareholders receive one additional share for each share they already hold, while the price per share is reduced by half. Although the number of shares owned doubles, the overall value of the investment stays unchanged.

A bonus issue offers shareholders additional shares, but it comes with both advantages and potential drawbacks. In this section, we examine how bonus shares can benefit shareholders and the liquidity of the stock, while also highlighting the potential dilution of earnings.

Pros:

• Increased shareholder value: Bonus issues allow shareholders to benefit from receiving additional shares, which can increase their overall investment holding.
  

• Improved liquidity: The increase in the number of shares can lead to higher trading volumes, enhancing liquidity in the market.
  

Cons:

• Dilution of earnings: The total number of shares increases, which can result in a dilution of earnings per share (EPS).
  

No immediate cash benefit: Shareholders do not receive any actual cash through a bonus issue, and their overall financial position remains unchanged, except for having more shares.

A stock split can make shares more affordable and increase market participation, but it also comes with certain challenges. Here, we explore the benefits of stock splits, such as enhanced liquidity, and discuss the disadvantages, including the potential misinterpretation of value.

Pros:

• Increased affordability: By reducing the share price, stock splits make shares more accessible to a wider range of investors, particularly retail investors.
  

• Higher liquidity: The larger number of shares in circulation can lead to higher trading volumes and enhanced liquidity in the market.
  

Cons:

• Perceived loss of value: Some investors might see a stock split as a sign of stagnation or a lack of growth in the company.
  

No actual value change: Although the number of shares increases, the total value of a shareholder’s investment doesn’t change after the split, which can cause confusion in the market.

To wrap up the comparison of bonus issues and stock splits, we provide a concise summary of the key points.

• A bonus issue results in shareholders receiving additional shares at no cost, while a stock split increases the number of shares but lowers the price per share, keeping the overall value of the shareholder’s investment the same.
  

• Bonus issues are typically used to distribute surplus reserves to existing shareholders, while stock splits adjust the share price and number of shares to improve accessibility for investors.
  

• Neither action changes the total value of the company, but they can impact how the market perceives a company’s stock.
  

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.