Difference Between Bonus Share and Stock Split

Bonus share vs stock split is among the two most common phrases or well-known corporate actions that must have often been heard in the news. The companies publicly list these two terms for boosting the traded share numbers. Bonus share and stock split have several things in common. Hence, one could easily get confused between the two. However, there is a difference between stock split vs bonus share. 
Companies choose different methods when it comes to rewarding their shareholders. This reward could either be in the form of extra shares or dividends. This is where Bonus share and stock split comes into the scene. In all situations, the number of shares held by shareholders will be increased without additional cost. Nevertheless, since the objectives of Bonus share vs stock split are different, this post will highlight the meaning of each term, followed by their advantages and disadvantages and the difference between them. 
 

What Is Bonus Share?

When businesses distribute more shares to their owners without receiving any payment (remuneration), this is known as a bonus issue or equity dividend. Shareholders receive these bonus shares at no further cost depending on their ownership percentage in the firm. Shares of the bonus are disclosed in a specific ratio.
Imagine a corporation alerting you to a 1:2 bonus problem. You can get one additional share of the firm for every two shares you own. Your investment's worth remains the same, though. 
Companies use their free reserves from actual earnings to give bonuses. Companies cannot issue bonus securities if they fall behind on principal and interest payments. 
 

Pros and Cons of a Bonus Issue

Discussed in detail below are the main pros and cons of a bonus issue:

Pros:

●    Investors are not required to pay taxes when they receive bonus shares. 
●    Long-term shareholders who aim to increase their investment find it advantageous. 
●    Bonus shares strengthen investor confidence in the company's operations as the company utilises the cash for business expansion. 
●    By holding a greater number of shares through bonus shares, investors will receive higher dividends when the firm declares dividends in the future. 
●    Bonus shares send positive signals to the market, indicating the company's commitment to long-term growth.

Cons:

●    Market speculation and market sentiment changes contribute to increased stock price volatility. 
●    Issuing the bonus shares necessitates a larger capital allocation from the company's cash reserves instead of distributing dividends. 
●    Despite the increase in the share numbers, the company's profit remains unchanged, resulting in a proportional decrease in earnings per share (EPS). 
 

What Is Stock Split?

When a firm divides an existing share into many shares, this is known as the stock split. In other words, a stock split might result in dividing a single share of a specific company's stock in your portfolio into two, three, or even more shares.
When share prices get too high, publicly listed corporations may decide to divide their stocks. This action lowers the unit cost of each stock. The liquidity of a company's shares, or how frequently the shares are traded on a stock market, can be increased by stock splits. The total share numbers exchanged over a particular period is known as volume. 
 

Pros And Cons of a Stock Split

The pros and cons of a stock split are:

Pros:

●    The total outstanding shares substantially increase through stock splits while the company's market capitalisation remains unchanged. 
●    The stock split reduces the share price proportionally, making it more affordable for investors. 
●    Splitting a stock enhances accessibility by increasing the available share numbers, facilitating ease of acquisition and sale for investors. 
●    Diversifying and rebalancing a portfolio becomes easier with high share numbers and low share prices. 
●    Companies can augment the share numbers by implementing stock splits rather than issuing new shares, thereby preventing stock dilution.

Cons:

●    The stock split involves significant costs and must be carried out by legal regulations and regulatory requirements. 
●    The stock split doesn't impact a company's underlying position and therefore does not contribute any value. 
●    The adjusted share price resulting from a stock split increases accessibility, potentially attracting a larger pool of investors, which may elevate the stock's volatility.
 

Bonus Issue vs Stock Split

Here’s the difference between bonus share vs stock split:

Bonus Issue and Stock Split: What Is Its Impact on Share Price

Bonus Issue: 

During the bonus issue, the share price is directly impacted by the share numbers issued. For instance, if a company declares a 5:1 bonus issue, let's examine the scenario:

Before the Bonus Issue:

●    The share price is 500
●    The total share numbers held is 100

After the Bonus Issue:

●    The share price after the bonus issue is 100 (500/5)
●    An additional number of shares allotted is 500
●    After a bonus issue, the Total share numbers held is 600 (500 additional + 100 existing shares)
It is important to note that its face value remains unchanged following the bonus issue.

Stock Split

Between stock split vs bonus share, in the stock split, the share price is influenced by the share numbers issued. Let's consider a scenario where a company declares a stock split of 1:3. It implies that each share will be classified into three shares:

Before the Stock Split:

●    The share price is 500
●    The total share numbers held is 100
●    Face value of each share: 20

After Stock Split:

●    After the stock split. The Share price is 166.66 (500/3)
●    Total share numbers held after the stock split is 300
●    Each share's face value after the stock split is 6.66

It's important to highlight that market capitalisation will stay the same before and after the stock split. 
The method for calculating market capitalisation is as follows: 

[Share price] x [Total number of shares].
N X P = MC 
N: Number of outstanding shares
MC: Market Capitalization
P: Price of each share 

Suppose, a firm has a market capitalisation of Rs 1 lac and has ten thousand shares, each share will have a value of ten rupees. So, the shares will be divided in a ratio of 1:2. Accordingly, any shareholder who now owns one share will get two shares. In this instance, the share numbers rise to twenty thousand shares, while the price per share falls to five rupees. In this manner, market capitalisation will stay constant.  
 

Conclusion

The Bonus share vs stock split increase the number of shares and decrease their market value, but only the stock split affects their face value. The main distinction between a Bonus share and stock split is this. Bonus shares show that the business has produced additional reserves that it can add to the share capital. A stock split is a strategy to make pricey shares accessible to a wider shareholder base.