What is the Difference Between Bonus Issue and Stock Split?

Key Highlights of this Article

• When companies give additional shares to their shareholders without asking for any payment, it's called a bonus issue or equity dividend. Stock splits happen when a company divides one existing share into multiple shares.
  
• In a 4:1 bonus issue, shareholders get four extra shares for every one they already have. So, if you have ten shares, you'll end up with a total of 40 shares (4*10).
  
• In a 1:2 stock split, each share turns into two shares, and if you had 100 shares before, you'll now have 200 shares.
  
• The key difference between bonus issue and stock splits is how they increase shares number and decrease market value.
  

What Are Bonus Shares?

Whenever businesses distribute additional shares to their owners without receiving any remuneration (payment), this is known as a bonus issue or equity dividend. Bonus shares are distributed to shareholders based on their ownership percentage in the company. A specific ratio is used to disclose bonus shares.

For example, a corporation alerts you to a 1:2 bonus. For every two shares you own, you get an additional share. However, your investment remains the same. Bonuses are paid from free reserves from actual earnings. A company cannot issue bonus securities if it is behind on principal and interest payments.

Understanding Bonus Shares: An Illustration

Suppose you own 100 shares of Company X priced at ₹100 each, giving you a total investment value of ₹10,000. The company issues a 1:1 bonus share — you receive one extra share for each share you hold.

Before Bonus Issue

• Shares held: 100
  
• Share price: ₹100
  
• Total value: ₹10,000
  

After Bonus Issue (1:1)

• Shares held: 200
  
• Share price adjusts to ~₹50
  
• Total value: still ₹10,000
  

Even though the number of shares doubled and the individual share price halved, your total investment value remains unchanged. This shows how bonus shares increase share count without affecting the overall value of your holdings.

Reasons Behind Issuing Bonus Shares

Companies issue bonus shares primarily to reward existing shareholders without impacting cash reserves. It helps boost investor confidence and signals strong financial health, as firms usually announce bonuses when they have consistent profits and free reserves.

Bonus issues also make the stock more affordable by reducing the per-share price, encouraging greater liquidity and broader participation in the market. Additionally, they enhance shareholder loyalty by providing tangible benefits without requiring extra investment.

For companies, issuing bonus shares is a way to capitalise accumulated earnings, aligning growth with investor interests while maintaining a positive image in the market.

Advantages and Disadvantages of Bonus Shares

Bonus shares have the following advantages:

• Bonus shares are not taxed when investors receive them.
  
• It is advantageous for long-term shareholders who wish to increase their investment.
  
• With the additional cash, the company can expand its business, which strengthens investor confidence.
  
• As a result of holding bonus shares, investors will receive higher dividends when the company declares dividends in the future.
  
• The company's commitment to long-term growth is reflected in bonus shares, which send positive signals to the market.
  

Here are the downsides of bonus shares:

• Stock prices are more volatile when there's market speculation or market sentiment changes.
  
• Bonus shares require a much larger capital allocation from the company's cash reserves compared to dividend distributions.
  
• In spite of the increase in shares, the company's profit remains unchanged, resulting in a proportional decrease in earnings per share (EPS).
  

What Is a Stock Split?

Stock splits occur when a firm divides an existing share into many shares. Basically, a stock split divides a single share in your portfolio into two, three, or more shares of that company's stock.

Publicly traded corporations may decide to divide their shares if share prices rise too high. By doing so, each stock's unit cost is reduced. By splitting shares, a company can increase the liquidity of its shares or the frequency of its trading. During a given period, volume refers to the total number of shares traded.

Practical Application of a Stock Split

Imagine you own 100 shares of Company Y, each priced at ₹1,000, making your total investment worth ₹1,00,000. The company declares a 1:10 stock split, dividing each share into ten.

Before Stock Split

• Shares held: 100
• Share price: ₹1,000
• Total value: ₹1,00,000

After Stock Split (1:10)

• Shares held: 1,000
• Share price adjusts to ~₹100
• Total value: ₹1,00,000

Here, the stock becomes more affordable and liquid, encouraging higher trading activity, while your total investment value remains unchanged.

Reasons Behind Stock Splits

Companies opt for stock splits to make their shares more affordable and attractive to a broader investor base. As stock prices rise over time, smaller investors may find them expensive, limiting market participation. A split reduces the face value per share while proportionally increasing the number of shares held, maintaining the same overall investment value. This improves liquidity and enhances trading volumes, as more investors can enter the market.

Additionally, stock splits often create a perception of strong growth and confidence in the company’s future performance, further boosting investor interest and strengthening market positioning.

Advantages and Disadvantages of Stock Splits

The following are the stock split advantages:

• Through stock splits, the number of outstanding shares substantially increases while the market capitalisation remains the same.
  
• By splitting the shares, investors can afford to buy them at a lower price.
  
• A split improves accessibility for investors by increasing the number of shares available for purchase and sale.
  
• When share prices are low, and share numbers are high, diversifying and rebalancing a portfolio becomes easier.
  
• Instead of issuing new shares, companies can split stock to increase share numbers, preventing stock dilution.
  

Some of the disadvantages of stock split are as follows:

• Regulations and legal requirements must be met in order to carry out the stock split, which involves significant costs.
  
• A stock split does not affect a company's underlying position and, therefore, adds no value.
  
• Stock splits increase accessibility, attracting a larger pool of investors, which may boost the volatility of the stock.
  

Conclusion

The key difference between bonus issue and stock splits is how they increase the number of shares and decrease their market value. Only a stock split affects the face value of shares. Bonus shares indicate that the company has generated extra reserves that it can include in the share capital. On the other hand, a stock split is a method to make expensive shares available to a broader group of shareholders.