Home Money Stock Split vs Bonus Issue | How are they different?

Stock Split vs Bonus Issue | How are they different?

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Stock split and Bonus issues are the two common corporate measures used by publicly traded firms to increase the number of shares available. And, both of these words are commonly misunderstood by investors. Shareholders are rewarded in a variety of ways by publicly traded companies. These benefits can come either in the shape of dividends or in the form of additional shares.

Before we continue, let’s look at this video from Groww for a quick understanding:

What is a stock split?

A stock split occurs when shares get multiplied. During a stock split, the company’s market cap and the value of each shareholder’s investment remain unchanged, but the value of each share is reduced as the number of shares increases. A stock split is used to attract new investors and raise market capitalization over the medium to long term.

A stock split is seen by many investors as a sign that a firm is doing well, therefore the stock value rises as a result of investor participation. The primary motivation is to lower the share price to attract regular investors and so expand the investor base. As the quantity of shares in the market grows, it also improves liquidity, high liquidity results in an efficient market with a narrow bid-ask spread.

Also Read: Repo Rate! How does it impact the economy?

What is bonus share?

A bonus share is a free additional share offered to shareholders as a token of appreciation. Bonus shares are free shares given to the existing shareholders by the company. Bonus shares are distributed in proportion to the number of shares held by an investor. When a firm offers 1:5 bonus shares, for example, it means that for every 5 shares purchased, the shareholder will receive 1 free share.

Bonus shares have the same rights and protections as regular equity shares. The main difference between existing equity shares and bonus shares is that equity shares are provided in exchange for a monetary consideration, but bonus shares are issued without charge, thus the word bonus.

Key differences between the stock split and bonus shares:

Meaning: Stock split means the corporation divides its existing shares into multiple shares to increase the liquidity of shares’ where as bonus issues are additional shares issued to the existing shareholders in a specific proportion without incurring any additional costs.

Face value: There is no change in the face value in case of the bonus issue; however, the face value will reduce in stock split in the same ration.

Benefit: Bonus issue benefits the existing shareholders and both existing and new shareholders get benefited in case of stock splits.

Share capital & reserves: In case of bonus issues, share capital increases and reserves are reduced proportionately and that’s not the case in stock splits.

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