Difference Between Bonus Issue and Stock Split

Opening your portfolio and seeing an increase in the number of shares you hold is a great surprise. But now the question is, from where did you receive these new shares of the company? Well, if you have not personally purchased these shares, then it can mean one of the following things.

These are the bonus issues and stock splits that have entered the picture. Both look similar at first glance, but they work in very different ways. And this is why it is important for you to understand both in proper detail. 

So, read this guide to know the key points of difference between a bonus issue and a stock split. Understand each of these and their importance well. 

What Are Bonus Shares?

Bonus shares are extra shares that a company gives to its existing shareholders at no extra cost. Instead of paying cash dividends, the company rewards investors by issuing additional shares from its accumulated reserves. Your total investment value stays the same, but the number of shares you hold increases.

Features of Bonus Shares

Bonus shares come with some clear characteristics that investors should know before reacting to the announcement.

• Issued free of cost to existing shareholders.

• Based on a fixed ratio such as 1:1 or 2:1.

• No fresh capital is involved.

• Funding from existing reserves only. 

• Share price adjusts after the bonus issue.

Pros of Bonus Shares

Bonus shares often create a positive sentiment in the market. This is valid especially for long-term investors. The benefits of the same are:

• Increases the number of shares held without extra investment.

• Signals management confidence in future growth.

• More shares for trading and investing means higher liquidity. 

• Tax-efficient compared to cash dividends in many cases.

Cons of Bonus Shares

Bonus shares are definitely great. But there are some drawbacks as well, which you must know:

• Immediate cash benefit is not there.

• Earnings per share (EPS) may dilute after the issue.

• Share price falls proportionately after the bonus.

• Does not change the actual value of the investment.

What Is a Stock Split?

A stock split is a corporate action under which the company divides its existing shares. This increases the number of shares. The total investment remains constant. But the price of each share changes. By doing so, companies make the shares more affordable and tradable. But remember, this is not the same as the demerger of stocks.

Features of Stock Split

A stock split brings a great change in share structure. The key points that you must know are:

• Existing shares are split into smaller units.

• Common ratios include 1:2, 1:5, or 1:10.

• The Face value of the share reduces after the split.

• Total market capitalisation stays the same.

Pros of Stock Split

Stock splits are often viewed as a move to attract more retail participation.

• Makes shares affordable for small investors.

• Improves liquidity due to higher trading volumes.

• Positive market perception in many cases.

• Easier price discovery after the split.

Cons of Stock Split

Despite better accessibility, stock splits also have certain drawbacks.

• No real increase in shareholder wealth.

• It can create short-term speculation in the stock.

• Earnings per share (EPS) reduce proportionately.

• Does not reflect an increase in company profits.

Difference Between Bonus Issue and Stock Split

At first glance, bonus issues and stock splits may appear identical. This is because both increase the number of shares you hold while the share price adjusts. However, the reason behind each action and the way it impacts the company's reserves and face value are very different. 

When you know the difference between a bonus issue and a split share, you can plan your investment well. The key points are:

Conclusion

For many investors, bonus issue and share split sound similar. But the reality is that these two work in quite a different manner. Where one offers you additional shares, the other divides your existing shares. This point is what makes changes in your investment value and returns. But in the end, both help with liquidity and affordability in the market. 

Knowing this difference will make you feel confident, as you know the meaning of these corporate actions. And so, if you are looking for a trusted partner, check the insights available on Rupeezy to make informed decisions.

FAQs

What is better for investors, a bonus issue or a stock split?

Neither is better by default. A bonus issue shows confidence in reserves. But a stock split improves affordability. The impact depends on the company’s fundamentals.

Does a bonus issue increase wealth?

No. It only increases the number of shares. The total investment value remains the same after the price adjustment.

Does a stock split reduce share value?

No. The share price reduces. But the number of shares increases proportionately, keeping the total value unchanged.

Is a bonus issue taxable in India?

Bonus shares are not taxed at the time of issue. Tax applies only when you sell them as per tax rules.

Why do companies announce stock splits frequently?

Companies use stock splits to attract retail investors and improve liquidity. Also, this helps to keep share prices within a comfortable trading range.