When a company does well, it rewards its shareholders, often through stock splits or bonus shares. At first glance, they might seem similar since both increase the number of shares you own.
However, they affect stock prices in different ways and serve different purposes. As an investor, it’s important to understand the difference between the two. So, how do you differentiate between Bonus Issue vs. Stock Split?
How do they impact your investments? Let’s explore this together!
What Are Bonus Shares?
A bonus share is a free extra share offered to existing shareholders. Companies issue them from their profits instead of paying cash dividends. Companies issue bonus shares for the following reasons:
- To reward shareholders when the company prefers not to give cash dividends.
- To raise stock liquidity, making it easier to purchase and trade stakes.
- To build investor confidence, bonus shares signal that the organisation is financially strong.
How Bonus Shares Work?
Let’s say a company announces a 1:2 bonus issue. For every 2 shares you own, you’ll get 1 extra share for free. So, if you had 100 shares before, you’ll now have 150.
But here’s the thing: the company’s overall value won’t change. The share price will adjust accordingly. For example, if the stock were INR 600 before the bonus, it would drop to INR 400 after the 1:2 issue. This helps keep the company’s total value the same.
Pros and Cons of Bonus Shares
Now that you know What is Bonus Issue, let’s understand the pros and cons of bonus shares:
| Feature | Pros | Cons |
| Investor Impact | Increases investor holdings without additional cost. | It does not provide immediate liquidity since it’s a non-cash benefit. |
| Company Perception | Boosts investor confidence in the company’s financial health. | Can dilute earnings per share (EPS), affecting stock perception. |
| Investment Strategy | Encourages long-term investment. | This may signal that the company prefers reinvestment over paying cash dividends. |
| Tax Implications | Reduces tax burden compared to dividends (taxed upon eventual sale). | Tax is applicable only when the bonus shares are sold, potentially leading to future liability. |
What Is Stock Split?
A stock split occurs when a firm splits its current shares into numerous smaller ones. The company does this to make the stock more affordable and attract investors. But why do companies split their stocks? Here’s why:
- Lowering the cost per share and making it easier for investors to buy.
- To increase liquidity, making it easier for people to trade the stock.
- Keep the stock attractive, especially if the price has become too high.
How Do Stock Splits Work?
Let’s say a company announces a 2-for-1 stock split. This means each existing share will be split into two. If you had 100 shares before, you’ll now own 200 shares after the split.
Like bonus shares, the stock price adjusts as well. If the share was ₹1,000 before the split, it will become ₹500 after the 2-for-1 split. However, the total value of your investment remains unchanged.
Pros and Cons of Stock Split:
Now, let’s look at the pros and cons of stock split:
| Feature | Pros | Cons |
Affordability | Makes shares more affordable, attracting retail investors. | Does not change a company’s fundamental value. |
Easier purchase and selling | Increases liquidity, making it more effortless to purchase and sell shares. | There may be short-term price changes as traders react to the split. |
Higher profitability | Often leads to higher trading volume and potential price appreciation. | It might create a false impression of increased value without actual financial growth. |
Bonus Shares vs. Stock Split: The Main Differences
While both Bonus Issue vs Stock Split increase the number of shares an investor owns, they differ in purpose, effect, and how they are carried out.
| Factor | Bonus Shares | Stock Split |
| Definition | Free shares issued from company profits | Existing shares are split into multiple smaller shares |
| Purpose | Reward shareholders and reinvest profits | Reduce stock price and attract more investors |
| Source | Issued from the company’s retained earnings | No impact on the company’s earnings |
| Impact on Share Price | Decreases proportionally | Decreases proportionally |
| Effect on Market Capitalisation | No impact | No impact |
| Investor Wealth | Remains unchanged | Remains unchanged |
| Accounting Impact | Reserves are reduced share capital increases | No change in financial statements |
Which One is Better for Investors?
Although staying well-informed about the pros and cons of bonus shares and stock splits is important, you must also know which is right.
Bonus Shares Are Ideal When:
- If you believe in long-term growth, bonus shares increase your holdings without requiring more investment.
- If the company has strong profits and wants to reinvest earnings instead of paying cash dividends.
- If you want to hold onto your shares and wait for potential appreciation.
Stock Splits are Ideal When:
- If the stock price is too high, it is difficult for small investors to buy.
- If the company wants to increase market participation and liquidity.
- If you are a short-term trader looking for increased trading activity.
Choose Wisely for Smarter Investing
If you’re investing, it’s important to understand these concepts and the difference Between Bonus Issue & Stock Split. They don’t boost your wealth directly, but they help more people join the market and build investor confidence.
If you want to trade smarter, platforms like Made for Trade by Dhan offer tools and strategies that simplify the investment journey and help you grow alongside a community of informed investors.
