All publicly listed companies use a few measures to reward their shareholders. A bonus issue is one way of providing additional shares to the shareholders as a token of gratitude. For example, a company may offer these shares in the ratio of 1:5, i.e., for every five shares held, the shareholders will receive one bonus share.
On the other hand, a stock split is the splitting of a company’s stock. Therefore, it increases the number of shares of a company.
What happens to Share Price in Case of Bonus Issue and Stock Split?
First, we will consider the bonus share issue:
A company will adjust the stock price in case of a bonus issue.
Consider this example:
A bonus issue of 1:5 means that the shareholder will get one bonus share for every five shares held. The stock price before the bonus offer was Rs. 100, and the number of shares was also 100. After the bonus issue of shares, the number of shares increases to 120, but the value per share falls to Rs. 83.
Now let’s understand the stock split with the help of an example:
Let’s say that a company has announced a stock split of 1:2. It means that for every 100 shares held by shareholders, they will have 200 shares. The face value of shares before the stock split was Rs. 100. Now, after the stock split, the face value of shares will be Rs. 50. If the stock is split in a 1:2 ratio, then the number of shares doubles while the share’s price halves.
Difference between Bonus Issue and Stock Split
| Parameters |
Bonus Issue |
Stock Split |
| Definition | A company may issue a bonus share to its existing shareholders as a perk or appreciation token. | Share split means that a company is dividing its share into two or more shares depending on the split ratio. |
| Face value | The face value of a share does not undergo any change. | Face value decreases in case of a stock split. The reduction happens in proportion to the split ratio. |
| Objective | Companies offer bonus issues as a substitute for dividends, reducing their accumulated reserves. | The rationale behind the stock split is to increase the company’s liquidity. It is also a means to increase the shareholder’s coverage. |
| Who is eligible? | This applies to existing shareholders only. | The benefits of a stock split are available to existing and potential investors. |
| Reserves and share capital | Reserves get reduced proportionately, whereas the share capital increases. | Both reserve amount and share capital remain the same. |
| Future dividend | The dividend remains unaffected in case of a bonus issue. | Dividends will reduce in case of a stock split. The reduction will occur in a proportion of a stock split. |
Advantages of Bonus Issue
Here are some advantages of the bonus issue:
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Creditworthiness
The issue of bonus shares to existing shareholders makes these companies more attractive to potential investors. Issuing bonus shares is a way of capitalising on their profits. Hence, the creditworthiness of companies increases in the eyes of investors.
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Dividends
You will receive additional shares in case of a bonus issue without any cost. This means you will receive additional dividends as well from these bonus shares.
Disadvantages of Bonus Issue
We will discuss some limitations of issuing bonus shares:
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Time-consuming
A bonus issue requires approval from various regulatory bodies, making it a time-consuming process. Delays on the part of regulatory bodies may hamper the company’s plans.
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Volatility
A bonus issue is an unexpected announcement made by the company. Although it is beneficial to investors as they will receive extra shares without any monetary cost, the unexpected move may lead to volatility in the stock price.
Advantages of Stock Split
Here are some advantages of a stock split:
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Wide reach
A very high share price can negatively influence investors’ interests in the stock market. To combat this, companies go for a stock split mainly to reduce the share price while keeping its value intact. It allows small investors to invest in the company, thus widening the shareholder base.
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Liquidity
Companies split their shares, and as a result, the liquidity of their shares also increases. Demand for their shares also increases as more and more people become interested in them. It becomes easier to buy and sell shares on stock exchanges.
Disadvantages of Stock Split
Some of the disadvantages are as follows:
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No real change
In case of a stock split, the company’s fundamentals do not undergo any significant changes. The value of companies also does not change. So, it may be meaningless to carry out such a lengthy process without adding anything to the market capitalization of companies.
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Expensive
A stock split is a lengthy process involving time and money. Companies hire merchant bankers to carry out this process; they charge very high fees for offering their services. Many people consider that a stock split is a mere cosmetic change, and high costs incurred on these may be put to use somewhere else.
Final Word
Bonus shares and stock splits are two important ways a company may carry out internal restructuring without altering its fundamentals. It is more important from a company’s point of view; the only real benefit that existing shareholders receive is additional shares without any monetary cost.
Frequently Asked Questions
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What is a reverse stock split?
As the name suggests, a reverse stock split is the opposite of a stock split. In the case of a reverse, the number of shares in a company decreases. All outstanding shares stand rescinded, and the company allows new shares to exist shareholders in proportion to the reverse stock split ratio.
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What sign does the bonus share issue give to investors?
Issuing bonus shares to investors shows the decent financial health of the company. This is a positive signal for prospective investors.
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What is the eligibility for bonus issue?
Before the record date, any shareholder having shares in the company is eligible for a bonus issue. The record date is when a company decides for shareholders to become eligible for bonus issues.
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