Stock Market FAQs: Stock Split vs Bonus Issue - know the differences

We often hear in the news that some XYZ company has announced bonus shares to its investors and some other company is going for stock split. Sometimes, we also see that whenever a company announces Stock Split or Bonus Issue, it will have an immediate impact on stock price in the stock exchanges.

At the outset, both – Stock Split and Bonus Issue – appear as one and the same from an investor point of view as he/she will be receiving additional shares without paying any extra amount. However, there are lot of differences between the two concepts an investor must know.

For the benefit of beginners in the stock market, Zeebiz presents the essential differences between the two.

Stock Split vs Bonus Shares:  Meaning

According to the Securities and Exchange Board of India (SEBI), already owned shares are split into small shares during Stock Split while free additional shares are given to existing shareholders based on number of shares owned by a shareholder during Bonus Shares.

Stock Split is meant to improve liquidity by breaking a share into smaller size while Bonus Issue is meant to distribute gains of accumulated earnings without paying cash to the shareholders.

What happens to face value of a share?

While the face value of a share is reduced in proportion of split ratio during Stock Split, it remains the same during Bonus Shares.

For instance, when a company splits a stock in the ration of 1:10, every already owned share is split into 10 new shares of new face value of 1/10 of original face value.

When a company announces Bonus Issue in the ration of 2:1, a shareholder gets two free shares for every one share already owned. In other words, the shareholder will have three shares now with the same face value as before.    

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Impact on Share Capital & Reserves

There will be no impact on share capital and reserves during the Stock Split. However, when a company announces Bonus Shares, the reserves will be reduced. On the other hand, share capital will go up as new shares are issued during Bonus Shares.

What will be the impact on future dividend?

After stock split, dividend will be reduced in proportion to split ratio. Whereas dividend will remain the same after Bonus Issue.