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Companies often announce corporate actions like bonus issues and stock splits to reward shareholders or make their shares more affordable. Both increase the number of shares and reduce the stock price, but they serve different purposes and work differently behind the scenes.
Understanding the difference between bonus issue and stock split helps investors interpret these announcements correctly and assess their impact on long-term holdings. In this blog we’ll explains what is bonus issue and stock split mean, how they work, and what sets them apart.
Bonus issue, also known as a capitalization issue, is when a company rewards its existing shareholders by issuing additional shares at no extra cost. These shares are distributed from the company’s accumulated reserves, usually when the business has reported strong performance.Bonus shares are always allotted in proportion to the number of shares an investor already holds.
Bonus Issue example
5:1 bonus issue means that for every 5 shares held (as on the record date), shareholder receives 1 additional share. So, if you hold 100 shares, you will receive 20 bonus shares.
Different bonus ratios such as 1:5, 1:1 or 5:1, determine how many extra shares investors receive. While the number of outstanding shares increases after a bonus issue, the stock price adjusts proportionally. This keeps the company’s market capitalization unchanged. Importantly, the face value of the shares does not change during a bonus issue.
Why Do Companies Issue Bonus Shares?
Companies announce bonus shares for several reasons:
- To reward shareholders: Instead of paying cash dividends, firms use bonus shares to appreciate the support of existing investors without impacting their cash flow.
- To utilise surplus reserves: When a company has strong profits and large free reserves, it can convert a part of those reserves into share capital by issuing bonus shares.
- To improve share liquidity: By increasing the number of shares available in the market, trading volumes often rise, making the stock easier to buy and sell.
- To reflect financial strength: A bonus issue is generally seen as a positive signal. It shows that the company is confident about its performance and long-term outlook, which can help strengthen investor trust.
What Happens to the Company’s Finances After Bonus?
When a company issues bonus shares, it shifts a portion of its reserves into share capital. This is known as the capitalisation of reserves. The company’s overall value remains unchanged, but the total number of shares increases, which naturally impacts a few financial metrics.
- Earnings Per Share (EPS): As more shares are now in circulation, the same profit is distributed over a larger base, causing EPS to decline.
- Book Value Per Share: The company’s net worth gets divided among more shares, reducing the book value per share.
- Market Price Per Share: Stock price adjusts downward to reflect the higher number of outstanding shares.
Stock split is a corporate action where a company increases the number of its existing shares by splitting them into smaller units. No new shares are created; instead, each existing share is divided according to the split ratio.
Example
If a company announces 1:2 stock split, means every 1 share you hold becomes 2 shares. So, if you own 100 shares, they will turn into 200 shares after the split.
In a stock split, face value of the share also reduces. If the face value was ₹10 before a 1:2 split, it becomes ₹5 afterward.
Why Do Companies Do Stock Splits?
Companies usually go for a stock split for a few practical reasons:
- To make share price more affordable: When a stock trades at a very high price like ₹8,000 or more, it may discourage small investors. Splitting the shares brings the price down and makes it easier for more people to buy.
- To improve liquidity: After a split, there are more shares available at a lower price. This often increases trading activity and makes the stock easier to buy and sell.
- To attract new investors: A lower share price can draw more interest from retail investors, which can help increase the stock’s visibility and participation.
What Happens to the Company’s Finances After Split?
Unlike a bonus issue, stock split does not involve shifting money between reserves and share capital. The company’s overall share capital, reserves, and market capitalization stay exactly the same. The only things that change are the face value and the number of shares.
Here’s what happens after a stock split:
- EPS and book value per share fall because the total shares increase.
- Market price per share adjusts downward in line with the split ratio.
- Your ownership stake and total investment value remain unchanged.
Bonus Issue vs. Stock Split: What’s the Difference?
In split face value changes to 5 and number of shares also increases to 4 crores hence new share capital value remains exactly the same ₹20 crores, reserves also remain same at 60 crores and total equity will be 80 Cr.
In a bonus issue the number of shares increases but the face value remains the same. if there’s a 1:2 bonus, for every 1 share, you get 2 bonus shares. If the company initially had 2 crores shares after the bonus it becomes 6 crores shares. The increase in value is adjusted from the company’s reserves.
And reserves will reduce from 60 to 20 crores, but our total equity remains exactly same, 80 crores similarly, in Stock Split, share capital gets adjusted and in bonus issue reserves get adjust. But our total equity, i.e., our market cap remains exactly the same.
Final Words
Both bonus issue and stock split increase the number of shares and reduce the market price, but the key difference lies in the face value. A stock split changes the face value of a share, while a bonus issue does not.
A bonus issue reflects that the company has built strong reserves and is confident enough to convert part of those reserves into share capital. On the other hand, a stock split is mainly done to make a high-priced share more affordable and accessible to a wider group of investors.
Understanding the difference between bonus issue and stock split helps investors evaluate corporate actions more clearly and make better investment decisions.
Frequently Asked Questions On Split vs Bonus Issue
What happens in a bonus issue?
A bonus issue gives existing shareholders extra shares for free by converting the company’s reserves into share capital. Your share count increases, the price adjusts, but your total investment value remains unchanged.
How is a stock split different from a bonus issue?
A stock split divides existing shares and reduces the face value, while a bonus issue issues additional shares from reserves. Both increase share count, but only a stock split changes face value.
Why do companies issue bonus shares or split their stock?
Companies issue bonus shares to use surplus reserves and reward investors. Stock splits make high-priced shares affordable, improve liquidity, and attract more retail investors.
Bonus vs. stock split — which is a better opportunity?
A bonus issue reflects strong reserves, while a stock split improves affordability. The real opportunity depends on the company’s fundamentals, future earnings, and your investment goals.
What’s better, buying after bonus issues or after splits?
It depends on valuation. Bonus issues and splits don’t change the company’s value. Buy only if the stock remains fundamentally strong and fairly priced after the corporate action.
