Bonus Issue Vs Stock Split

September 7, 2023

Bonus Issue Vs Stock Split

The main difference between a bonus issue and a stock split is that the bonus issue offers existing shareholders extra shares in a certain proportion, whereas a stock split separates a single share into two or more shares based on the split ratio. Another difference is that a stock split decreases the par value of each share, whereas a bonus issue increases the number of shares that a shareholder holds.

The companies have different ways of rewarding their shareholders and boosting the number of shares. The bonus issue and a stock split are two certain measures that companies carry out. In both situations, companies reward shareholders with extra shares without having them pay for it.

Contents:

Bonus Issue Meaning

A bonus issue, also known as a bonus share or scrip issue, is a way of reward where companies offer free and additional shares to existing shareholders. This strategy is used by companies to compensate shareholders with extra shares out of the company’s reserves when they have a profitable turnover. Bonus shares are given out in a particular ratio.

At its core, a bonus issue is when new shares are given to current owners on a pro-rata basis. This means the number of bonus shares each shareholder gets is directly related to how many shares they already own. This involves the distribution of new shares, thereby increasing the total number of outstanding shares.

A company’s accrued profits, retained earnings, or reserves are frequently used to fund a bonus issue. This decision demonstrates both a dedication to compensating loyal shareholders and confidence in the company’s future development prospects. By choosing to issue bonus issues, a company demonstrates its capacity to generate surplus funds while maintaining a solid financial position.

The impact of a bonus issue on market dynamics is one of the most compelling aspects of a bonus issue. While the distribution of bonus shares increases the number of outstanding shares, the company’s underlying fundamentals remain unchanged. As a result, the market price of each share adjusts accordingly, generally decreasing after the issue of bonuses. However, this decrease in price is neutralized by the increased number of shares held by each investor, resulting in a neutral effect on the company’s total market capitalization.

The justification for a bonus issue goes beyond simple numerical adjustments. The goal of companies is to increase the liquidity of their stock by making it accessible to a broader range of investors. This increased accessibility frequently attracts retail investors who may have been deterred by a higher stock price, potentially nurturing a more vibrant trading environment.

What Is A Stock Split?

A stock split is a financial strategy where a company divides its existing shares into multiple new ones to increase the liquidity of the shares. The market value of the company’s stock remains unchanged while the number of outstanding shares rises.

This procedure is carried out proportionally across all shareholders, ensuring each investor retains the same number of shares. A stock split’s primary purpose is to reduce each share’s trading price. Simply put, the lower stock price makes them more affordable, which, in return, expands the investor pool.

The mechanics of a stock split are fairly simple. Example: a company announces a 2-for-1 stock split. An investor receives one additional share for each share they already own. Therefore, an investor who owned 100 shares before the split would now hold 200 shares, each priced at half the pre-split price. This maneuver makes the company’s shares more accessible and affordable to attract more investors.

It is essential to note that a stock split is not necessarily associated with financial rewards for investors. The total market capitalization of the company and the investment’s intrinsic value remain unaffected. The stock split is a creative response to the psychological factors that influence market behavior. Reducing the price per share can attract retail investors who were previously hesitant to purchase a stock with a higher price.

Companies implement a stock split as a strategic move to improve trading dynamics and potentially boost investor sentiment. By making their shares more accessible, companies can gain access to a larger pool of investors, potentially boosting demand and trading volume. Moreover, a stock split can project an image of development and vitality, signifying growth and market confidence to both existing and prospective shareholders.

Bonus Issue Vs Stock Split

The primary difference between a bonus issue and a stock split is that a bonus issue involves issuing additional shares to existing shareholders as a reward for the company’s profits, while a stock split involves dividing existing shares into smaller units, thereby reducing the stock price. 

Here are the key differences:

Bonus IssueStock Split
Rewarding current shareholders with additional shares from profits or reserves.Reduce the stock price by dividing existing shares into smaller units.
Utilizes accumulated profits, reserves, or surplus.Doesn’t involve funding; rearranges existing shares.
Rewards shareholders and enhances liquidity.Reduces share price attracts retail investors.
Share price usually falls due to increased shares.Share price decreases proportionally with the split.
Seen as a reward and market liquidity boost.Can project growth and attract broader investors.

Bonus Issue Vs Stock Split- Quick Summary

  • The main difference between a bonus issue and a stock split is that stock split divides a single share in two or more, and as to the split ratio, whereas a bonus issue offers an additional share to current shareholders.
  • The bonus issue is the distribution of free and extra shares to existing shareholders from the company reserves that amplify their returns.
  • Stock split divides existing shares into two or more shares to boost the number of shares. Maintaining the total market capitalization, these are intended to reduce face value and increase affordability.

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Bonus Issue Vs Stock Split – FAQs 

What is the difference between Bonus Issue and Stock Split?

The key difference between a bonus issue and a stock split is that a bonus issue involves issuing additional shares to existing shareholders as a reward for company profits, whereas a stock split involves the division of existing shares to alter their trading price.

Is a stock split the same as a bonus issue?

No, they are different. A stock split involves the division of existing shares to modify the trading price, whereas a bonus issue involves issuing additional shares to reward shareholders.

Do share prices fall after bonus issues?

Yes, share prices typically decrease following a bonus issue due to the increase in the number of shares, while the overall market value remains unchanged.

Are bonus issues good for investors?

Bonus issues are viewed positively by investors because they result in the free issuance of additional shares, which can potentially increase their overall investment value.

What are 2 advantages of bonus shares?

The primary benefit of bonus shares is that they enable existing shareholders to be rewarded without additional investment or taxes. Secondly, bonus issues are also advantageous as they allow returns to get amplified with enhanced market liquidity.

What is a 2 to 1 stock split?

A 2-to-1 stock split means that investors receive an additional share for every share they already own, effectively doubling the number of shares they hold while having the share price.

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