Difference Between Bonus Issue and Stock Split

Bonus issues and stock splits are two common corporate measures used by publicly traded firms to increase the number of shares available for trading. Both of these words are commonly misunderstood by investors. Shareholders are rewarded in a variety of ways by publicly traded corporations. These benefits can come in the shape of dividends or additional shares.Shareholders do not have to pay anything more in the case of a stock split or bonus issue. A bonus share is a free additional share offered to shareholders as a token of appreciation. Bonus shares are free shares given to current shareholders by the corporation. Bonus shares are distributed in proportion to the number of shares held by an investor. When a firm offers 1:5 bonus shares, for example, it means that for every 5 shares purchased, the shareholder will receive 1 free share.As a result, if an investor owns 100 shares at the time of the bonus, his or her holdings will increase to 120 shares. As a result, the share price will drop by 50% in a 1:1 bonus issue. Investors, on the other hand, tend to benefit in the long run when stock prices rise. The distribution of bonus shares is tax-free.Bonus shares have the same rights and protections as regular equity shares. The main difference between existing equity shares and bonus shares is that equity shares are provided in exchange for a monetary consideration, but bonus shares are issued without charge, thus the word bonus. A stock split occurs when a publicly-traded business divides its outstanding shares into more shares. During a stock split, the companys market cap and the value of each shareholders investment remain unchanged, but the value of each share is reduced as the number of shares increases. A stock split is used to attract new investors and raise market capitalization over the medium to long term. A stock split is seen by many investors as a sign that a firm is doing well, therefore the stock value rises as a result of investor excitement. The splits are generally announced after a protracted run-up in the companys share price. The primary motivation is to lower the share price to make it more accessible to regular investors and so expand the investor base. As the quantity of shares in the market grows, it also improves liquidity, high liquidity results in an efficient market with a narrow bid-ask spread. A bonus issue is when current shareholders are granted an additional share, whereas a stock split is when the same share is divided into two or more shares according to the split ratio. Existing shareholders benefit from bonus shares, and stock splits benefit both existing shareholders and new investors. The companys fundamentals will not change as a result of the bonus and stock split; the issued share capital, revenue, and profit will all remain unchanged. Only existing shareholders are eligible for Bonus Shares. The stock split will benefit existing shareholders as well as future investors.If the company decides to split its stock from a face value of ten to a face value of five, The number of stocks will be doubled, and the price will be altered; nevertheless, the face value of bonus stocks will remain unchanged, but the price will be adjusted in proportion to the bonus ratio. Bonus Issue Stock Split Meaning Existing shareholders receive additional shares in a specific proportion without incurring any additional costs in a bonus issue. To increase the liquidity of shares, the corporation divides its existing shares into multiple shares. Face Value No change Reduces in the same ratio Example For every one share owned, owners will receive four free shares in a 4:1 bonus issue. So, if you buy 10 shares, youll get a total of 40 (4*10) shares. In a stock split in the 1:2 ratio, for every 1 share held, it will become 2 shares, for every 100 shares held, share count will become 200 shares. Benefits Existing Shareholders Existing Shareholders and potential investors Share Capital & Reserves The share capital increases but the reserves gets reduced proportionately the share capital and reserves remains the same NormalAfter Bonus Issue (1:1)After Stock Split(1:2)Stock Price 1005050Face Value10105Outstanding shares100,000200,000200,000 Reserves 200,000 100,000 200,000