What is Different between stock split and bonus share

 What is Different between 

stock split and bonus share 

 

Bonus and split are two documented corporate actions undertaken by the publicly listed companies to spice up the amount of shares traded. Investors usually get confused between these two terms.

Read this blog to know the difference between these corporate actions and why companies take corporate action and the way they impact shareholders.

 Table of Contents 

1.what's Bonus Issue? 

2.what's split ? 

3.Difference between Bonus issue & split

 4.Bottom line

What is Bonus Issue?

Bonus Issue also referred to as capitalization issue, offers additional shares to the prevailing shareholders with none cost. Companies with low cash balance may issue bonus share instead of cash dividend as a way of providing regular income to its shareholders. there's just an additional financial impact as shares are funded via reserves.

Issuing bonus shares increases the amount of shares which results in decrease within the stock price of the corporate in proportion to the bonus ratio, which makes the stock attractive for retail investors who hesitate to take a position in companies that are fundamentally strong but are available at higher rate.

Price per share, Earnings per share (EPS) or, value per share (BVPS) falls because the number of shares goes up. A bonus issue is taken positively as a symbol of excellent health of the corporate . When bonus share are issued the worth of the shares fall proportionately but the corporate value remains an equivalent .

For example; In 2020  wipro Ltd. declared 1:1 bonus, pre bonus no. of outstanding shares were 6,184,127,021 with face value 5/share, post-bonus no. of shares were 1.2368254e10 with face value 5/share. Issuing bonus is same like making a narrow slice of a pizza. the entire size of the cake doesn't change by what percentage times you narrow it.

Pros and Cons of a Bonus Issue:

Pros:

Bonus issues end in a discount of the stock. But this will be beneficial because the market reach of the stock increases. If a stock is valued at Rs.1000, after a bonus issue, the worth will come down making it easier for people with low capital to shop for higher quantities of those shares.

Bonus share issues are essentially the capitalization of profits. Such a step always enhances a company’s creditworthiness. Making the corporate more attractive to investors all around.

As a shareholder, you get more shares, which successively means more possible dividend payments within the future.

Cons:

Speculation and overall market sentiment changes resulting in more volatility within the prices of the stock.

The Issuance of Bonus shares may be a lengthy process and requires tons of regulatory approvals from various authorities.

What is a Stock Split?

A split is that the action taken during which a corporation divides its existing shares into multiple shares to spice up the liquidity of shares. Split is typically taken when the stock price is high, making it pricey for investors to accumulate . It brings down the share price since the amount of share increases but the worth of the stocks remains an equivalent . the sole thing that gets divided is face value. the first motive is to form share affordable to retail investors.

For example; In 2020 page Industries split their stocks within the ratio of 1:2, which suggests every 100 shares held by existing shareholders will have 200 shares. It split the stock with the face value of Rs. 2/share to Rs. 1/share. Pre-split shares were 25 crores shares of face value Rs.2, post-split it had been 50 crores equity shares of face value Re.1 each.

Pros and Cons of a Stock Split:

Pros:

The main advantage of a split is that it reduces the worth of a share making it cheaper for investors.

The number of shares traded increases, making the ownership base wider.

Cons:

Increases speculation within the markets. This results in higher volatility within the prices of the stock.

Stock splits are an upscale and tedious process. The legalities behind it and regulatory approvals required are immense.

What is a Reverse Stock Split?

A reverse split is simply the other of a split . during this case, the amount of outstanding shares of the corporate reduces. This corporate action leads to a rise within the price of the stock.

You may think that a share increase is sweet for the corporate but the rise thanks to a reverse stock split is especially an accounting trick.

Here the market capitalisation of the corporate remains an equivalent . Basically, the corporate simply cancels all outstanding shares and distributes new shares in direct proportion to what you owned earlier.

For instance, during a 1 is to five reverse stock split , you'd now own 1 share for each 5 shares you owned. If you owned 1,500 shares, for instance , then you'd find yourself with 300 shares.

Companies usually do reverse stock splits to stop the stock price from falling an excessive amount of . It shouldn't be checked out as a symbol of strength, but actually , it indicates weakness within the company’s financials.

Difference between Bonus issue & Stock Split

A bonus issue is a further share given to existing shareholders while split is same share divided into two or more as per the split ratio. Bonus shares are benefited to existing shareholders while both existing shareholders and potential investors can enjoy split .

In bonus and split , fundamentals of the corporate aren't getting to change, the issued share capital remains an equivalent , the revenue remains an equivalent , and therefore the profit remains an equivalent too, the sole thing which can be affected is that the face value and reserves capital.

If the corporate goes for a split from the face value of 10 to the face value of 5. the amount of stocks will get double and therefore the price will get adjusted, whereas in bonus face value remains an equivalent but the worth will get adjusted in proportion to the bonus ratio.

Frequently Asked Questions 

What is the aim of stock split?

In order to spice up the liquidity of shares company takes up the split action where existing shares of the corporate is split into multiple shares.

How are stock splits good for investors?

Stock split results in decrease within the share prices, making it cheaper to investors for investing. So, as a result it increases the liquidity within the stock.

Why would a corporation do a reverse stock split?

Companies usually do a reverse split so as to stop the share price to travel very low. As under reverse split number of outstanding shares decreases which results in increase in price of stocks.

What is the utilization of issuing bonus shares?

Main use of issuing bonus share is to capitalize the free reserves within the event of no new investment avenues for the corporate . It also increases the liquidity within the share because the number of share increases

What quite companies issue bonus shares?

Companies that have high reserves and no new avenue for investment issues bonus shares

Are bonus shares an honest sign to an investor?

yes, issue of bonus share may be a good sign for the investor because it reflects the great health of the corporate . As bonus shares results in decrease within the share price and increase within the number of shares but value of the corporate remains an equivalent .

Key Takeaways:

Bonus issues and stock splits are corporate actions primarily undertaken to stop share prices from rising too high.

Reverse Stock splits are undertaken to stop the share price of a corporation from falling an excessive amount of .

Though the amount of outstanding shares increases and therefore the price per share falls, the market capitalisation (and the worth of the company) doesn't change.

Bonus issues and stock splits help make shares cheaper to small investors and provides greater marketability and liquidity within the market.