Difference Between Bonus Shares and Stock Split

As an investor, you may have heard of the terms “bonus share issue” and “stock split,” but do you really understand what they mean and how they differ from each other? With both corporate actions making headlines in the news, knowing their advantages, disadvantages, and differences is essential to make informed investment decisions.

In this article, we will break down the complex concepts of bonus issues, and stock splits in a simple and easy-to-understand language, so you can confidently navigate the stock market.

What are Bonus shares?

Bonus shares are additional shares given by a company to its existing shareholders as a bonus, free of charge. Bonus shares are issued to the shareholders in proportion to the shares they already hold. 

For example, in case of a 1:1 bonus issue, shareholders will receive 1 bonus share for ever share they hold already.

What are the advantages of bonus shares?

From the company’s perspective:

• It can be used as an alternative to dividend payment in case of a cash shortage.
• It can create positive sentiments amongst investors that the company believes in growth.

From the investor’s perspective:

• They get additional shares without any additional costs or taxes.
• It can increase the liquidity of stocks, and investors can buy stocks at lower prices than pre-bonus issues.
• Existing investors can sell some shares while retaining a stake in the company.

What are the Disadvantages of Bonus Shares?

From the company’s perspective:

• The earnings per share decrease due to equity dilution, which may make the stock less attractive to potential shareholders.
• The administrative costs of bonus issues may be higher than dividend payments.
• The company does not receive cash for those bonus shares, which may reduce its ability to go for a follow-on public offer.

From the investor’s perspective:

• The investors do not receive additional wealth due to bonus issues. 
• The share prices decrease according to the bonus ratio, and the company’s market capitalisation remains the same.

Past Examples of Bonus Shares

Infosys, Wipro, BPCL, Samvardhana Motherson are some companies that have given bonus shares to their investors more than 3 times since the year 2000.

Here is a list of companies that have given bonus shares recently in 2023

Source: Moneycontrol.com

What is Stock Split?

A stock split is a corporate action when a company increases its outstanding number of shares by splitting one share into multiple shares in a ratio. This effectively reduces the price of each share but does not affect the value of holding.

For example if a stock ABC was trading at a price of ₹100 and had a face value of ₹10  and the company decides to split it in the ratio of 1:10, then for every 1 share held previously investors will receive 10 shares of ₹1 face value and market value of ₹10.

What are the advantages of stock split?

From the company’s perspective:

Increased stock affordability may be attractive to potential investors.

From the investor’s perspective:

After the stock split, investors can buy more shares of the issuing company at a lower price.

Increased liquidity of the stock.

What are the disadvantages of stock split?

From the company’s perspective:

The company incurs substantial legal and administrative costs in performing a split in the stock market.

From the investor’s perspective:

The stock split may lead to stock price volatility, indicating higher short-term risk for investors.

Difference Between Bonus Share and Stock Split

Here are the key differences between stock splits and bonus issues:

Final thoughts

In conclusion, while both stock splits and bonus issues may have similar effects, such as increasing the number of shares and reducing the stock price without significant changes in a company’s fundamentals, they differ in terms of the company’s rationale for performing them, impact on share value and capital, and other factors.

FAQs