stock splits and bonuses
Splits and bonuses both require a minor adjustment to your capital base. When a shareholder receives a bonus, the business capitalizes the earnings kept in its free reserves and issues new shares to the original shareholder. Explore all details about What is Bonus Share and Stock Split in this article.
Only the par value, or fair value, of the stock is lowered proportionately in the event of a split. Let’s examine this using a real-world example.
Bonus Shares And Stock Split Difference
If you have been involved in the stock market for any length of time, you are probably familiar with the well-known tale of how, over the course of the last 38 years, Wipro had numerous opportunities to turn you into a multimillionaire.
That is, of course, presuming that in 1980 you refrained from giving in to the allure of spending Rs 10,000 on a Bajaj scooter and instead chose to purchase 100 Wipro shares.
38 years later, after 11 bonuses and 2 stop splits, Rs 10,000 becomes Rs 505 crore.
Bonus Shares V/s Stock Split Example: What is Bonus Share and Stock Split
How Does the Share Price Affect Things?
> Bonus Issue
The stock price will be changed in the bonus issue in accordance with the bonus number of shares issued. Let’s say a business disclosed a 4:1 ratio bonus issue, similar to the one in our previous scenario.
Bonus to ratio: 4:1
Prior to the bonus issue, stock price was Rs 100.
Prior to the bonus issue, there were 100 shares total.
Following the bonus issue
400 shares are in the count.
After bonus issue, stock price: (100*100)/400 = Rs 25
The stock price drops in tandem with the bonus issue when there is a bonus issue. If there had been a 1:1 ratio for the bonus issue, the stock price would have dropped to Rs 50.
> Stock Split
Additionally, the share price is divided in half in the ratio of a stock split.
Ratio of stock split: 1:2
Prior to the split, the stock price was Rs 100.
Prior to the stock split, there were 100 shares total.
following a stock split
200 shares are in the count.
(Rs100x100shares)/200 shares is the stock price.
Stocks listed in the company’s books and share certificate are valued at face value. Unless there is a stock split, it stays constant and is decided at the time of issuance. The face value of a stock split is split in the same ratio as the shares since they are being split in the same proportion.
In the case above
The face value of a share will drop to Rs 5 if it was Rs 10 prior to the stock split.
Additionally, the share price is divided in half in the ratio of a stock split.
Ratio of stock split: 1:2
Prior to the split, the stock price was Rs 100.
Prior to the stock split, there were 100 shares total.
> After stock split
200 shares are in the count.
(Rs100x100shares)/200 shares is the stock price.
Stocks listed in the company’s books and share certificate are valued at face value. Unless there is a stock split, it stays constant and is decided at the time of issuance. The face value of a stock split is split in the same ratio as the shares since they are being split in the same proportion.
In the case above
The face value of a share will drop to Rs 5 if it was Rs 10 prior to the stock split.
| Srl No. | Subject | Bonus Issue | Stock Split |
| 1 | Meaning | Bonus issue is extra shares given to shareholders free of cost. | Stock Split divides the existing outstanding shares of the company into multiple shares. |
| 2 | Example | For a 4:1 bonus issue, shareholders will receive four shares free for every one shareheld. So for 10 shares, will get 40 (4×10) shares in total. | In a stock split in the 1:2 ratio, for every 1 share held, it will become 2 shares, for every 100 shares held, share count will become 200 shares. |
| 3 | Face Value | No change | Reduces in the same ratio |
| 4 | Company Rationale | An alternative to dividend and giving away accumulated reserves | To increase share liquidity, reduce share price and make it affordable for more shareholders. |
Advantages and Disadvantages of a Bonus Issue.
Below are the primary benefits and drawbacks of a bonus issue, each in detail:
Advantages:
- It is favorable for long-term shareholders who want to expand their investment because they do not have to pay taxes on bonus shares.
- Bonus shares enhance investor confidence in the company’s operations as it uses the funds for expansion.
- Investors will receive higher dividends when the company declares dividends in the future because they will own a larger number of shares through bonus shares.
- Bonus shares send positive signals to the market, indicating the company’s commitment to long-term growth.
Disadvantages
- The company’s decision to issue bonus shares requires a larger capital allocation from cash reserves rather than dividend distribution.
- The company’s profit remains unchanged despite the increase in share numbers, resulting in a proportionate decrease in earnings per share (EPS).
- Increased stock price volatility is a result of market speculation and shifts in market sentiment.
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Conclusion
Only the stock split impacts the shares’ face value; the bonus share vs. stock split increases the number of shares and decreases their market value.
This is the primary difference between a stock split and a bonus share. Bonus shares are evidence that the company has made further reserves that can be used to increase the share capital.
A stock split is a tactic used to increase the number of shareholders who can purchase expensive shares.
Watch this YouTube Video for More Details:
Are bonus shares beneficial to investors ?
Benefits of Bonus Stocks
Bonus shares provide investors more shares to purchase, increasing their stake in the business and raising the stock’s liquidity.
Bonus share recipients are not burdened by tax ramifications because none exist.
What does the term “2 1 bonus share” mean ?
Bonus shares at a 2:1 ratio have been announced by Standard Capital Markets Limited, a Non-Banking Financial Company (NBFC).
This implies that for every share that an eligible shareholder owns, they will receive two bonus shares.
Is it possible to sell bonus shares ?
Bonus shares are extra shares that the business gives away for free to current shareholders. To satisfy liquidity needs, shareholders may trade these shares on the secondary market.
Can I immediately sell bonus shares ?
When shares are divided, the new face value of the shares is credited right away. However, in the event of a bonus issue, the shares are credited following the ex-date by a few days, often fifteen.
Therefore, in order to avoid going to auction, the investor cannot sell the share before it is deposited to your Demat account.
For whom are bonus shares available ?
Bonus shares are issued by a firm to all existing shareholders prior to the ex-date and record date.
But the firm equities have to be purchased before the ex-date in order to be eligible for bonus shares.
How do I get my bonus shares back ?
The shares must be bought on or before the day before the ex-date/record date in order to be eligible for a bonus or dividend.
Bonus shares are typically credited to the shareholder’s demat account after the ex-date/record date in about 15 days, though the exact time frame may vary depending on the RTA.
What is the bonus share cap ?
The maximum ratio for bonus issuance is1:1, meaning that a business can only issue one bonus share for every one original, previously issued share.
Do bonus shares entitle us to dividends ?
This implies that in the event that the business chooses to pay dividends in the future, you will receive payments based on both the shares you bought and the bonus shares.
On the other side, rights issues happen when a business gives its current shareholders new shares.
How is the bonus portion determined ?
Calculation: Suppose a corporation announces a 1:1 bonus issue and you own 100 shares of the company. In this instance, you will receive one bonus share for each share that you presently possess.
That means you will get 100 bonus shares in addition to your 100 shares.
