Stock split versus bonus issue: 4 key points of differences that every investor should know
The primary aim for stock split is to make the stock more affordable for small retail investors. It, thereby increases the investor base.
Understanding corporate actions is crucial for investors as it impacts the stock price. Also, such a financial initiative taken by the listed entity can offer insight into the company's financial health and helps in ascetaining whether to buy or sell a particular scrip.
So, here is a quick take highlighting the differences between Stock split and bonus shares.
Stock split versus Bonus issue
In stock split, the company's already outstanding shares are split into more shares, whereas in the case of bonus issue additional free shares are given to existing shareholders based on the number of shares owned.
Reason for these corporate actions
The stock split is carried out to improve liquidity in the scrip by breaking it into more shares. Meanwhile, bonus shares are issued to distribute gains of accumulated earnings without paying cash to the shareholders.
Change in face value on account of the corporate action undertaken
The face value in the case of stock split reduces in proportion of split ratio, whereas it remains same in the case of bonus share issuance.
Share capital and reserves
In the case of a stock split there is no impact, while for the company issuing bonus shares the reserves are reduced as the money is moved to share capital for the issuance of fresh shares.
Impact on future dividend
In the case of stocks wherein a stock split has been undertaken, the dividend pay-out shall be reduced in proportion to the split ratio. Nevertheless, there is no change in the future dividend stream in the case of shares for which bonus shares are announced.
Understanding stock split and bonus issue with examples
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Example |
Stock Split = 1:10 Every already owned share is split into 10 new shares of new FV of 1/10 of the original FV. Bonus issue = 2:1 Shareholder gets 2 free shares for every 1 share already owned. So finally he has 1+2 =3 shares of the same FV as before. |