Companies can issue different types of shares to raise capital. The choice between a bonus issue vs. a stock split is big for shareholders and companies. One of these acts as a reward, while others are a way to make the shares more affordable. Yet, both bonus issues and stock splits look way too similar on a basic level.
Let’s see the meaning and difference between a bonus issue vs. a stock split!
What is a Bonus Issue?
When a company gives new bonus shares to its existing shareholders without charges, it is a bonus issue. A bonus issue is popular as a reward for shareholders. For this issue, the company’s reserves are converted into share capital. Hence, the cash flow stays unaffected.
Features of Bonus Issue
You must learn each share’s unique features to understand the difference between bonus issues and stock splits. Let’s understand the features of the bonus issue:
- No Extra Cash Flow
The company does not need to use any extra cash flow. Moreover, even the shareholders get a bonus free of cost.
- Allocation of Shares
In a bonus issue, shares are issued in a fixed ratio. So, all shareholders’ bonus issues will depend on their original holding.
- Impact on Share Price
An issue of bonus shares makes them affordable because of a decrease in share price. The overall capital of the company increases with the issue of bonus shares. On the other hand, the company’s cash reserves are affected negatively by the issue of bonus shares.
Pros and Cons of Bonus Issue
Each type of share issue comes with its pros and cons. So, let us understand the pros and cons of bonus shares through the following tables:
| Pros | Details |
| Increases Shareholder Income | There is an increase in the number of shares that all the shareholders own in a company. The bonus shares can be credited directly to the demat account. |
| Impact on Liquidity | It improves the scope of trading and attracts more retail investors to join the company. |
| Tax Benefits | The issue of bonus shares comes without any tax application. The taxation takes place only at the sale of bonus shares. |
| Impact on Company Image | Issuing bonus shares works in favour of the company, as it shows the shareholders that they have been considered. It improves the scope of future performance for the company. |
| Cons | Details |
| Dilution of Earnings | Since the number of shares increases, the total earnings per share decreases. |
| No instant Cash Benefit | A bonus issue will not provide an instant cash return to its shareholders. Neither does it raise any funds for the company. |
What is a Stock Split?
As the name suggests, it is a split in the stocks. Hence, a stock split is the division of existing shares into multiple units. This reduces its face value while increasing the total outstanding shares. In this case, there is no change in the overall investment of a shareholder, even after the stock split.
Features of Stock Split
Understanding the features of stock splits will help you understand the differences between bonus issues and stock splits.
| Features | Details |
| Proper Division | Each share is split into a ratio fixed by the company. |
| No Change in Market Position | Even after a stock split, the stocks’ overall market value and the company’s position remain unchanged. The only change that happens is that the share price adjusts a bit downward. |
| Affordability | With a lower face value, the stock split shares make these investments easier and affordable for the general public. |
Pros and Cons of Stock Split
Just like bonus shares, the stock split has pros and cons. Let’s check them out.
| Pros | Details |
| Improves Liquidity | More shares mean more access to the market. |
| Attracts investors | The lower face value of shares attracts retail investors and other employees to invest. |
| Positive Shift | The issue of a stock split by any company is often seen as a sign of growth or financial stability in the market today. |
| Cons | Details |
| No impact | This splitting of the stocks does not impact the shareholders’ holdings. |
| Limited Benefits | Unlike any other type of share issue, a stock split will not directly increase a company’s profitability. |
Difference Between Bonus Issue & Stock Split
After understanding the basics, let’s look at the differences between bonus issues and stock splits in this table:
| Parameter | Bonus Issue | Stock Split |
| Meaning | These are extra shares issued by the company | These are existing shares split into two or more by the company. |
| Impact on FV | None | Stock Split reduces the face value of shares |
| Impact on Share Capital | Increases overall share capital | None |
| Earnings per Share | Gets diluted | Not affected |
| Taxation | Tax applied at sale | Tax applied at sale |
| Market Position | Is a sign of profitability | It is a sign of growth and stability |
How to Choose Between Stock Split and Bonus Issue?
The company and shareholders are both impacted by the choices made. Hence, choosing between bonus issue vs. stock split wisely is important.
- Bonus Issue is Best When:
A company wants to reward its shareholders but still save its cash. This shows the market that the company has a strong reserve of cash. Moreover, as investors, bonus issues mean potential long-term benefits.
- Stock Split is Best When:
A company wants to improve its liquidity. This can happen by making its stock cheaper. It helps in attracting retail investors. People who prioritise affordability prefer holding stock splits.
Managing Shareholder Value: Bonuses Against Stock Splits
Companies deliberately choose between these systems to communicate strong reserves (bonus issuance) or improve stock affordability and liquidity to draw a larger investor base (stock split), rewarding loyal owners.
Knowing the difference between stock splits and bonus concerns is vital for both businesses and investors. Although both acts raise outstanding shares, their effects on share capital, face value, and the fundamental message sent to the market differ greatly.
