Understanding the difference between bonus issue and stock split

# Understanding the difference between bonus issue and stock split

Updated: 14 Dec 2021, 03:25 PM IST
TL;DR.

## Firms use both bonus issues and stock splits to increase the number of shares. Let’s take a look at how these two are different.

Firms use both bonus issues and stock splits to increase the number of shares.

Bonus issues and stock splits are two popular ways by which listed firms increase their total number of shares. These are some of the ways to award a shareholder, by increasing the total number of shares they hold. In both bonus and stock split, shareholders do not have to pay any extra money for the additional shares.

## Let's better understand the two concepts:

Bonus shares

Bonus shares are basically additional shares issued by a company to its pre-existing shareholders. These are fully paid shares and the shareholders do not have to incur any extra costs to get them. The number of bonus shares you receive depends on the number of shares of the firm you already hold. All shareholders who own shares of the firm before the ex-date, which is determined by the firm, are eligible for bonus shares.

The company issues these shares in a particular ratio. Suppose a firm has announced a bonus share of 4:1, then for every 1 share, the shareholder will receive 4 more. So if you own 20 shares, you will get 4*20 which is 80 additional shares.

Bonus shares have the same features as equity shares. The main difference is that you pay money to buy an equity share, while a bonus share is free of any cost to shareholders.

Stock Split

As the name suggests, this means splitting a single stock into 2 or more stocks. No additional shares get issued in a stock split but existing shares get multiplied. This also gets done in a particular ratio. Suppose a firm has announced a stock split of 1:2, then every 1 share, will become 2. So if you own 20 shares of a firm, after the split, you will hold 2*20 which is 40 shares without any additional costs.

Stock split vs bonus issue

Difference

1) Stock split generally occurs after a massive run-up of a stock's price. The firm divides shares mainly to decrease the share price and make it more affordable to investors and increase liquidity. While this happens in case of bonus issues too, it is a way of rewarding investors in case of a great profit year. Sometimes it is also used instead of dividends.

2) While a bonus issue mainly benefits existing investors. A stock split benefits existing as well as future investors.

3) Stock split does not bear any additional cost to the company like in the case of bonus shares. In a stock split, the reserves of a company remain the same while it gets reduced in a bonus issue.

However, one must note that the fundamentals of the firm like revenue, profit, etc are not affected by either of the two. Also, during a stock split as well as a bonus issue, the company's market cap and the total investment value of the shareholders remain the same while the face value of a share decreases.

Firms use both bonus issues and stock splits to increase the number of shares, however, only stock splits have an impact on the face value of a share. In 2021 to date, 58 companies have issued bonus shares while around 40 firms opted for a stock split.

First Published: 14 Dec 2021, 03:25 PM IST