Introduction

Companies use two simple techniques to compensate you, the shareholders, apart from dividend division—bonus issues and stock splits. Neither of these actions involves any monetary exchange but merely changes the number of shares held by you. Understanding these concepts makes it easier for you to understand how companies increase their liquidity and demand in the market.

In this article, you will learn about the meanings of bonus issues and stock splits, the logic behind these actions, and their key differences.

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Understanding Bonus Issue

A bonus issue is a corporate decision taken by companies to issue additional shares to you, the existing shareholder, at no cost. The bonus shares issued are in proportion to your existing holdings. For instance, in a 1:1 bonus issue, you receive one additional share for every share you hold. A bonus issue stems from a company’s undisposed profits while retained earnings are turned into equity shares. This action increases the total number of shares you hold in a company without a corresponding increase in market capitalisation.

Understanding Stock Split

When your existing share is divided into smaller units, it is known as a stock split. In the case of a 2:1 stock split, your single share is split into two units. Though your number of shares increases, the face value per share reduces without changing the market capitalisation. This action ensures stocks are more liquid and available at lower prices for you. For instance, if your stock is trading at ₹100, a 2:1 stock split changes the face value of your stock to ₹50 per unit. A stock split doesn’t change your rights as a shareholder or the value of your investment.

Reasons for Bonus Issue

Here are the reasons companies opt for bonus issues.

• A bonus issue is a simple way to reward you without doling out additional monetary rewards. The free shares issued increase your equity holding in a company.
• It acts as a token of appreciation and improves your confidence by showcasing the company’s profitability and stability to you.
• Bonus issues attract you to make long-term investments by improving a company’s market perception.
• Another reason for the bonus issue is it ensures a business can retain its earnings while improving your morale and confidence without doling out cash payments.

Reasons for Stock Splits

Here are the reasons companies opt for stock splits.

• A stock split reduces the share price, making shares more accessible and affordable for you. This, in turn, increases your interest and market participation as an investor.
• Due to the stock price reduction, stock splits also attract a diversified investor base. In the long run, this will push you towards increasing trading volume.
• A stock split is used to readjust a stock’s price according to market perception. When stocks have a high price tag, it creates an image of overvaluation, which can be adjusted via a stock split.

​​​​​​​ Bonus Issue vs. Stock Split: Key Differences

Bonus issues and stock splits benefit both the issuers and you, the investor. Understanding the following key differences will enable you to make smarter investment decision-making.

Impact on Share Price

Share price reduces when additional shares are issued at no cost to you (existing shareholders) in a bonus issue while a share’s face value stays unchanged. However, share price and face value reduce proportionally to the split ratio in a stock split.

Impact on Your Holdings

In a bonus issue, the number of your shares increases without a corresponding change in the investment value. For instance, in a 1:1 bonus issue, where you have 10 shares priced at ₹100 per share, you will have 20 shares worth ₹50 each. Your existing shares are divided into smaller chunks in a stock split, increasing your share’s affordability. For instance, in a 2:1 stock split, the price of your existing share is reduced in half without changing its investment value.

Tax Implications

Though there are no immediate tax implications for a bonus issue or stock split, you will be charged capital gains tax when you sell your corresponding shares.

Long-Term Implications

A bonus issue sends a strong signal of financial stability and profitability that not only attracts further investors but also improves your confidence as an existing investor. A stock split also encourages you to invest further, but it does this by enhancing your existing stock’s liquidity and affordability.

Conclusion

Companies use bonus issues and stock splits to signal financial stability, growth, and liquidity. Though they are an excellent means to handle your expectations, they also affect your shareholding. A bonus issue increases your shareholdings, while a stock split attracts more investors. Understanding the differences between these two actions and their implications will give insight into how to fine-tune your investment strategies. To make better investment decisions, consider your risk tolerance and investment goals.

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