In the world of investing, terms like “bonus shares” and “stock splits” often come up, especially when companies aim to make their shares more accessible to investors. While both actions increase the number of shares available to shareholders, they do so in different ways and have distinct implications for investors. Let’s break down the differences between a bonus issue and a stock split.
What Are Bonus Shares?
Bonus shares are additional shares that a company gives to its existing shareholders without any extra cost. These shares are issued out of the company’s reserves or profits, and are distributed in a certain ratio, like 1:1 or 2:1. This means if you own 100 shares and the company issues bonus shares in a 1:1 ratio, you will receive an additional 100 shares, bringing your total to 200 shares.
Key Points About Bonus Shares:
- No Cost to Shareholders: Shareholders do not pay for bonus shares; they receive them for free.
- Increased Shareholding: Your number of shares increases, but the value per share decreases proportionally. However, your total investment value remains the same immediately after the bonus issue.
- Signal of Confidence: Companies often issue bonus shares as a sign of confidence in their future prospects, indicating that they have accumulated sufficient reserves.
What Is a Stock Split?
A stock split, on the other hand, involves dividing the existing shares of a company into multiple shares. The face value of each share is reduced, but the total market value of the shares held by an investor remains the same. For example, in a 2:1 stock split, each existing share is divided into two, and the price of each share is halved.
Key Points About Stock Splits:
- Face Value Reduction: The face value of the share decreases, but the total value of the shares remains unchanged.
- Increased Liquidity: Stock splits are often done to make shares more affordable and increase liquidity in the market.
- No Impact on Ownership: The ownership percentage of the shareholders does not change, even though the number of shares increases.
Comparing Bonus Shares and Stock Splits
- Purpose: Bonus shares are issued to reward shareholders and increase the capital base, while stock splits are primarily done to make the shares more affordable and improve market liquidity.
- Value Impact: In a bonus issue, the share price adjusts downward to reflect the increase in the number of shares, but the market capitalization of the company remains the same. In a stock split, the share price is also adjusted, but the total value of shares held by an investor remains unchanged.
- Shareholder Benefit: Bonus shares increase the number of shares you own without additional investment, while a stock split simply increases the number of shares by reducing the price, making it easier for more investors to buy.
Conclusion
Both bonus issues and stock splits serve different purposes but are beneficial to shareholders in their own ways. Bonus shares are often seen as a reward for shareholders, reflecting the company’s confidence in its financial health. Stock splits, on the other hand, are designed to make shares more accessible and increase liquidity. Understanding the differences between these two corporate actions can help you make more informed decisions about your investments.
At Signalz, our SEBI-registered professionals are here to guide you through such financial concepts, ensuring you make the most of your investment journey.